All You Need To Know In The Upcoming Brexit Deal

Brexit outlook remains dark at this moment, sell GBP/USD? 

Risk of not being able to reach a deal is rising now 

Prime Minister Theresa May won the vote of confidence in her government last week which was widely expected. However, now she needs to secure a Brexit deal before the March 29 deadline. 

A deal would require May to cross one of her negotiation red lines, to alienate her Eurosceptic colleagues and win support from opposition Labour Party lawmakers, which is no easy task. If she cannot deliver, Brexit will be delayed, and this will possibly result in a second referendum. 

Our base case is that May should manage to secure cross-party support for a customs union arrangement with the EU, to allow the UK to exit in April. However, other scenarios remain on the table. If May cannot break the deadlock in Parliament, even after extending Article 50, a second referendum will come into view. In our base case, we expect economic growth to rebound on news of a deal. A delay would mean uncertainty could persist longer than expected, weighing on activity. Our potential growth forecast continues to be underpinned by a judgment that the UK will end up in a customs union. 

The extent of the parliamentary defeat on January 15 for May’s deal makes a change of tack from the Prime Minister in the coming days almost certain. She has already indicated a willingness to work across Parliament to find a compromise. We believe she is likely to find the most support for permanent membership of the customs union as the blueprint for future trading relationships. 

For May, the approach would mean sacrificing the ability to follow an independent trade policy, which is currently one of her red lines. Nonetheless, she would be able to argue that she has ended free movement since the UK would have left the single market and delivered on the 2016 referendum result. But the current situation clouds the outlook for now. 

Even before the defeat of May’s deal, there were mumblings that the Article 50 deadline may have to be extended in order to get all the relevant legislation through Parliament. The EU has indicated a short extension is possible. We have set out the potential economic costs of delaying Article 50 here.

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