UK Politics: Recent developments reduce the risk of a disorderly Brexit – Opposition to UK Prime Minister Theresa May’s Brexit deal has continued to build, and it looks increasingly unlikely her deal will pass. However, the most important news, in our view, is the vote yesterday to give parliament a say on what course of action the government could take if – as is now widely expected – the deal is rejected by parliament on 11 December.
Following the vote, the government has 21 days to make a statement to parliament on how it intends to proceed. Parliament will then be able to make amendments to that position, potentially ruling out a no deal ‘disorderly’ Brexit, and/or requiring the government to hold a second referendum. In addition, PM May have to choose between a General Election and a second referendum when the deal is rejected by parliament and, faced with that choice, she may well opt for the latter.Furthermore, the Labour Party seems likely to back a new referendum in the case that it is unable to force new elections. In the case of a second referendum, it looks likely that the choice will be between a Brexit based on the deal or remaining in the EU.
While markets have interpreted events rather negatively so far – focusing on the political instability and uncertainty in the UK – we believe the most recent developments have reduced the risk of a disorderly Brexit, and raised the chance of the UK remaining in the EU after all – or perhaps remaining in the EEA. As such, we believe markets are underpricing, perhaps significantly so, the higher chance of a more positive scenario. We continue to see GBP/USD moving higher, reaching 1.45 by end 2019.