4 Potential Outcomes For Brexit: Probabilities And Market Impact

Brexit update: Summary

Where are we now?

  • On Jan. 29, the House of Commons rejected two cross-party amendments (Cooper-Boles and Grieve) that would have given it the legislative authority to effectively block a no-deal Brexit
  • Additionally, the Commons accepted a Conservative amendment (Brady) that obliges the government to renegotiate a new deal without a backstop
  • As the EU has already rejected the idea of a deal without a backstop, this sets the UK government on a collision course with their European interlocutors
  • Taken together, the rejection of the Cooper-Boles and Grieve amendments, and the acceptance of the Brady amendment, materially increase our subjective likelihood of a no-deal Brexit from 20% to 30%
  • As a result, the path to get to a positive Brexit outcome has materially narrowed in our view

Bottom line: With no-deal Brexit risks increasing and sterling having already experienced a strong year-to-date rally, we are now expecting to see sterling fall against the dollar and euro.   

Brexit update: Deep dive

The political background

On Jan. 29, Parliament voted on seven amendments to the deal Prime Minister (PM) Theresa May has spent the last two years negotiating with the European Union (EU). Three of these, namely the Brady, Cooper-Boles and Grieve amendments, had the potential to be market-moving. The Grieve and Cooper-Boles amendments, which would have given Parliament the legislative tools to stop a no-deal Brexit and come up with an alternative, both failed to gain majorities.

In contrast, the Brady amendment won the backing of the House of Commons. This amendment forces the government to renegotiate the currently agreed deal in order to remove the Irish Backstop and replace it with unspecified alternative arrangements. Arguably, it sets PM May on a collision course with EU officials who have already rejected the idea of a deal without a backstop. Collectively, these votes help explain sterling's 1% peak-to-trough fall with the U.S. dollar on Jan. 29, as can be seen in Figure 1.

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