4 Scenarios For The Dramatic Brexit Vote And GBP/USD

GBP/USD is trading above 1.3200 after a 300-pip recovery on Monday. Fraught negotiations over the weekend turned into a late-night deal. UK PM Theresa May and EU Commission President Jean-Claude Juncker announced a new agreement on the Irish Backstop.

May said that the new agreement includes legally binding changes, allowing the UK to exit and not be “trapped” in the EU’s Customs Union. An arbitration mechanism and further assurances that the EU does not want the backstop have been added. A legally binding option to exit the Backstop is critical to the support of Conservative Brexiteers and the Northern Irish DUP party.

And is it legally binding? Some hard-line Brexiteers such as Steve Baker say it isn’t and the opposition Labour Party dismisses the new accord by saying it has not changed anything.

The real arbitrator is Attorney General Geoffrey Cox. The pro-Brexit MP legal expert is trusted by supporters of Brexit.

Scenario 1: Cox approves, Parliament approves

 If he backs the deal and says it is legally binding, Parliament may finally pass the accord, and the UK will smoothly leave the EU on March 29th, 17 days from now.

In this scenario, GBP/USD is set to extend its gains quite significantly on the high level of certainty that will finally be achieved.

GBP/USD has room to rise to 1.3500 in this case.

Scenario 2: Cox approves, Parliament rejects

 If his words do not convince enough MPs and the government is defeated by a small margin, there may be another meaningful vote and hopes will remain high that some Labour MPs will come around to supporting this soft Brexit over uncertainty.

In this scenario, GBP/USD retreats from the recent gains but does not fall that much, as hope for approval will likely keep the pound bid.

GBP/USD could fall to 1.3000 but consolidate ahead of further developments.

3: Cox rejects, Brexit delayed

If he says it is not good enough, May may suffer another crushing defeat and uncertainty will be even higher. In theory, Parliament is set to vote on Wednesday on leaving without a deal, and most likely reject this option. And then, on Thursday, they will vote on a potential delay to Brexit. The length of the extension is unknown at this point, especially given the upcoming elections to the European Parliament. In any case, it is hard to believe a delay will do much to resolve the issues.

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