Key takeaways
We have updated our Brexit game tree (see page 3 in full piece).
As of today, it seems unlikely that there will be a third vote in the House of Commons on May's Brexit deal before the EU summit starting on Thursday 21 March.
We think the EU27 leaders will end up grating the UK an extension. While we previously thought a short extension was in the case, we have changed our mind and now expect a long extension (60% likely versus 30% probability for a short extension).
A long extension may increase the pressure on the Brexiteers to such a degree that they end up backing the deal. Some are speculating, despite Bercow's reservations, that May may try bring the deal forward for a vote again next week, if her strategy works.
A long extension would mean that the period with high uncertainties for companies is prolonged, which would continue to have damaging effects on the economy.
Overall, it seems like we will get a long extension or May's deal will pass soon. We still think May's deal passing is the most likely final outcome and a second EU referendum (after a long extension) is the second most likely final outcome.
We would be more concerned if the EU leaders are not able to reach consensus around an extension (10% probability). This would clearly increase the chance of a no deal Brexit happening but from a legal perspective, the extension can be granted until right before the deadline.
In our FX Forecast Update: ECB stance reintensifies the FX carry hunt , 18 March, we argue that both May's deal passing soon and a long extension of Brexit will eventually be positive for the GBP. Near-term, we think EUR/GBP will remain in the 0.85-0.87 range, as an extension is probably more or less priced in at this point.
To read the entire report Please click on the pdf File Below..