What next as House of Commons votes to take control?

Summary:

• UK MPs to hold indicative Brexit votes on Wednesday
• Brexiteer support for May rising
• GBP outlook remains constructive as long as no-deal unlikely

The latest twist in the Brexit saga has seen the UK parliament vote in favour of giving themselves greater input into the process of leaving the EU with a series of indicative votes now expected to take place tomorrow. This paves the way for a different path to that plotted by PM May but it is worth pointing out that any suggestions made by the House of Commons won’t be legally binding and the outcome could in fact help May’s deal pass.

Not the worst defeat for May

Stating that last night’s loss for the government is not the worst of its tenure is hardly a bold claim, but all things considered it is probably one that Theresa May would admit in private is not the most damaging. When the PM announced the two separate extensions from the EU last week, most expected a third meaningful vote to be held (and lost once more by the government) before MPs undertook these indicative votes. However, the sequence will now see indicative votes first and the pressure is now on parliament to achieve a majority behind an alternative strategy.

This could help the government in two ways; first, a failure to provide clear support for an alternative would further support the notion that parliament know what they don’t want (IE no-deal Brexit, May’s deal, 2nd referendum) but don’t actually know what they do want. Second, and perhaps even more beneficial to the PM, would be if Brexiteers who have hitherto failed to back her deal due to concerns that it doesn’t represent their ideal version, start to fear that the longer this goes on the more it favours a softer Brexit - or even no Brexit at all.

Brexiteers to support May?

ERG chair Jacob Rees-Mogg has alluded to as much by recently announcing that May’s deal is better than not leaving at all. Of course, even if Rees-Mogg is onboard, that doesn’t mean all ERG members will be and the DUP still appear reluctant to support the government on this. The parliamentary arithmetic remains highly challenging even if these events do occur, but last night’s defeat for the government may well end up being not a bad one to lose.   

Nature of vote could be key

How the indicative votes themselves are carried out could well be a key aspect to watch. In an attempt to avoid splitting the vote MPs could asked to vote in round, first selecting their preferred option from a long list (possibly selecting multiple options) before the popular selections proceed to a knock-out. This type of elimination procedure would likely see the more extreme options such as no-deal and 2nd referendum fare well initially, before losing in the knock-out. Due to the nature of democracy, middle of the road propositions are the most likely to succeed and there’s a good chance the last remaining could well be May’s deal or a softer version with a permanent customs union - full single market access still seems improbable as it would fail to end free movement of people.      

What does it all mean for the pound?

While the continued uncertainty is clearly not a positive for the pound, the eventual outcome is looking increasingly favourable for the currency. Assuming no-deal doesn’t rear its ugly head once more, then the outcomes seem to range from slightly positive for sterling (May’s deal) across a spectrum of increasingly supportive alternatives (Customs union, Norway+) to the most beneficial which would be a second referendum. May’s deal has now shifted from the best case scenario for the pound in a two-horse race with no-deal, to the worst-case in an increasingly more positive field. There will no doubt be substantial intra-day volatility driven by the latest headlines on this front, but unless the prospect of no-deal looks anything more than remotely possible then the path of least resistance for the pound remains higher.  

GBPUSD has been in a fairly narrow range in recent months, but dips towards 1.30 have been bought. A golden cross printed a few weeks back but the market needs to make a clean break above 1.3380 before a sustained rally can occur. Source: xStation