Theresa May, the British Prime Minister suffered another defeat in the parliament again yesterday. Her new deal, “legally binding,” was thrown out by the British lawmakers. This created huge whipsaws for GBP/USD and EUR/GBP pair. To put things in perspective, sterling-dollar was trading at 1.3237 at 07:45 AM London time and it dropped 1.3010 at 11:15 AM, that is over 200 pip move in only a matter of a few hours. The below chart shows the journey for the sterling-dollar and euro-sterling in terms of their percentage gain as the events unfolded yesterday. The most dramatic change is in the one-month volatility for Sterling-dollar which literally plunged yesterday.
The MPs in the parliament were clear that they had enough of Theresa May and her set of tactics are no longer going to work anymore. She has wasted two solid years and achieved nothing in this period. Thus, the result confirmed that her failure for the Brexit vote by 149 votes. The devastating fact for her is that 75 Conservative MPs voted against her deal.
What Now?
Later today, at 7 pm London time, the MPs will vote if they are going to take the scenario of a no deal Brexit off the table completely. Markets have certainly priced this as a positive outcome of this vote. This is the chief reason that we have not seen the intense sell off for sterling yesterday when the prime minister agonized a defeat. It could be true that market participants are completely oblivious. Perhaps, maybe they are getting ahead of themselves. This is because if no-deal Brexit becomes the reality, it would bring an unprecedented catastrophe for the markets.
Voting for a no deal Brexit would open the door for the extension of Article 50. In other words, the Brexit would be delayed. There are a number of issues with this. First of all, there is no clarity how long the extension would be, and most importantly, if the EU would be open to the option of renegotiation.
The fact is that today’s no deal Brexit vote isn’t that simple. There are some critical elements need to be taken care off before a no deal Brexit vote becomes a reality. Remember, the EU also need to agree with such an outcome, and we know that they are playing hardball with the UK, making sure the UK value any concession it gets from the EU. Jean Claude Juncker, the EU Commissioner has made it clear that he is no mood to re-open the negotiation process. He has also warned that a no deal Brexit is a high probability scenario, again something which the market is completely ignorant of. But anything coming out of politicians’ mouth should always be taken with a pinch of salt, they mostly do not follow what they say.
The Same Hole Again
The issue with the delay of Brexit is that we could be looking at the same hole in a few weeks or months. There is no assurance that another few months are going to resolve this issue given that the politicians have not achieved anything in the past two years.
It is this particular factor which I think the market participants are largely undermining. Kicking the can down the road doesn’t really resolve anything for this matter.