What now for Brexit as another delay is on the cards

An agreement but a blockage in Parliament

Boris Johnson somehow found agreement with the EU-27 when almost all had given up hope. However, the arithmetic in Parliament has been against him. It was important last night that the “Second Reading” of the Withdrawal Agreement Bill (WAB) had a majority of 30 in the Commons (Ayes 329 to Noes 299). This is the first time ANY sort of deal has found a majority in favour. However, Johnson’s hopes of ramming through this incredibly contentious legislation in just three days (when normal legislation takes a number of weeks) were dashed when the Government’s progamme motion failed.

This now means it is almost impossible for the Government to get the WAB through before 31^st October. With EU Council President Donald Tusk recommending another extension, this means another delay to Brexit. Perhaps our rubber stamp image is a bit premature, but it is overwhelmingly likely now.

The key is for how long? Either a technical or political extension will result.

• Technical – a short extension to pass legislation (2/3 weeks)
• Political – in order to hold a democratic event, such as a general election or second referendum (3 to 6 months)

Donald Tusk has not specified how long an extension would be.

What next?

The EU-27 will decide on whether an extension will be granted. Given that the EU do not want to be seen driving a no deal, it is highly likely that an extension to Article 50 will be granted. Boris Johnson has said that he will discuss with the EU how to move forwards.

In the coming days the EU-27 will presumably answer the letter that Boris Johnson sent on Saturday (requesting an extension). This will lay out the terms of an extension they are offering.

Boris playing the game, but a General Election is an attempt to break the log jam

In an ideal world, Prime Minister Johnson would want it all. He would want his form of a Brexit deal (tick) that has been ratified (unticked) but also have a stable government through a general election. He has this possibility of all this if there is an extension to at least 31^st January. He could easily insist to the EU-27 that a majority of 30 in the Second Reading of the WAB is insufficient to pass all the necessary legislation for Brexit. The highly contentious bill could easily fail in the coming weeks and also be significantly amended (second referendum and or customs union attached). Johnson would argue that a short, technical extension, may not suffice.

A longer extension would allow a General Election which could change the numbers in the House of Commons to be able to push the legislation through and finally put an end to the manner of the UK’s exit from the EU.

Johnson would want to go into an election with Parliament blocking the path to a deal. If Brexit is done before an election then the result of an election is far harder to call and harder to win for the Conservatives. The Opposition Labour Party is offering a time table to get the WAB through, and this is because they know an election is easier for them to win with Brexit done. Johnson is currently solidly ahead in most polls. So why would he want to jeopardise this?

Below is a poll of polls taken from the BBC on 18th October (which was after the agreement with the EU but before the latest likelihood of delay).

What next for sterling?

We have seen sterling rally enormously on Boris Johnson achieving an agreement with the EU. Cable had rallied around 800 pips to $1.3000 before hitting a barrier. However, the uncertainty will increase if there is a political extension to the 31^st October deadline.

Subsequently we see neutral to downside risk for GBP/USD now.

• A short technical extension would be broadly neutral for GBP/USD. Trading between $1.2900/$1.3000.
• A political extension would be sterling negative. Dragging GBP/USD back to $1.2600/$1.2800.

Two final things: 

• No deal risk significantly reduced. With Johnson’s EU agreement and subsequently finding a majority of 30 at the “second reading” stage, the potential for a “no deal” Brexit has been significantly reduced. A deal is on the table, Johnson just needs the numbers to implement it. Sterling will remain broadly supported by this.
• Oh, and a second referendum is for the birds. A second referendum would need to be primary legislation (from the Government) but also the appetite is seemingly not there in Parliament. This is still very unlikely at this stage. The only way it could happen would be after a General Election and in the event of a Labour/Liberal Democrats coalition.