Like the ‘constructive’ phase the US-China trade war is moving into, Brexit appears to be moving into the ‘agreement’ phase in the Commons.

This begs the question, the Brexit-millstone that has caused severe under- and de-valuation in UK assets possibly coming to an end, how high could Stirling go once Brexit falls off?

First and foremost – where is the Commons at in the Brexit cycle?

The latest amendments have created a ‘runway’ for the House (which was won by Theresa May this week). The 3-part runaway is as follows:

1. March 12 ‘meaningful’ vote on whatever ‘revised’ Brexit can be reached with the EU (unlikely to be anything drastic). If this doesn’t find a majority;

2. The Commons will vote on a “no deal” Brexit. If this is rejected (which is fully expected);

3. The floor will vote on an extension of Article 50.

The runway clearly has a caveat to my point: ‘no deal’ is still on the table as is ‘no Brexit’.

However, in practice, and from a GBP perspective, this week has shown that Theresa May has created a scenario where the parliamentary majority can rule out “no deal” Brexit by the end of March.

As even the most sceptic-of-Eurosceptics will not want a Labour-led second referendum which could arise if a ‘no deal’ looks likely to pass the floor as Europhile Tories would cross the floor. Nor will the most pro-of-Pro-Europhile want to crash out over a deal that might not be perfect in their eyes scuttling the chance of a ‘no Brexit’.

Likely Scenarios

According to the latest consensus, the market believes the most likely course for Brexit will be the ratification of the Prime Minister’s ‘rehashed’ Withdrawal Agreement after a 3-month extension to Article 50 – this sits at ~54%

The probability of a ‘no deal’ has fallen to 10%, the probability of ‘no Brexit’ has fallen to 30%. There are a few other permutations, but in the main, these are the one that matter from a currency perspective.

Mind the Gap – GBP bounce

These scenarios have the GBP wanting to snap to the upside, the mere fact a ‘no deal’ is now the most remote outcome saw GBP shifting significantly higher. This is a clear sign the GBP want to move up. However, it’s more than this, there are clearly investment-based ‘flows’ wanting to enter the UK once a deal is done which suggest a more structural shift over the medium term. It’s not surprising considering the undervaluation of UK assets due to the Brexit-millstone. The fact GDP growth, which has been impacted Brexit no doubt, hasn’t deteriorated to ‘scorched earth‘ levels as the market had priced in the past is a testament to this. A release of Brexit will see a revaluation.

As March progresses and the final outcome of the UK’s separation from the European Union builds watch for entry points on pullbacks. Market consensus shows that most expect a 3% jump in EUR/GBP to around 85.0/20 on basically any deal. GBP/USD is forecasted to move a little harder to $1.375/378.

Timing will be key, but it’s clear the direction for GBP is up, just mind the volatility during the Brexit negotiation intervals.

Article by FPMarkets.com