As it is unlikely that UK members will vote for a no-deal tomorrow after a crushing defeat yesterday, Long GBP/USD?

Last night, UK lawmakers rejected Prime Minister Theresa May’s deal by 391 to 242 votes. This is yet another devasting blow to May after her deal was similarly rejected in January by 230 votes. This is despite the last-minute changes she had made with the EU.

With the major defeat, two questions remain, with the first to be answered tonight during another round of voting: 

1. Will the UK leave without a deal?
2. Will the UK invoke Article 50 to extend Brexit deadline?

The members of the UK Parliament will be voting tomorrow, and it is widely expected that they will take a no-deal option off the table. Prime Minster May reiterated the best outcome is for the UK to leave the EU in “an orderly fashion, with a deal,” adding that “the deal we negotiated is the best and indeed, the only deal available.”

Furthermore, she offered a “free vote” whereby the government will not whip Conservative lawmakers to take a side.

It is likely that the members will reject leaving the EU with no-deal as they understand the devastation that can be to the country. Most members also have the obligation to answer on behalf of their people in their districts. Therefore, May will have no choice but to invoke Article 50 to extend the Brexit deadline which is seen as a bullish sign for Sterling.

Although postponing the crisis for another few months would not solve anything, it allows May to have more time to either renegotiate its terms with the EU (which is unlikely after EU Commission President Jean-Claude said there will be no further negotiation to the Brexit deal), or to consider a second referendum on Brexit.

On the other hand, a spokesman for EU President Donald Tusk said the result today increases the risk of the UK crashing out of the bloc without a deal. He said the EU will consider any request from the government to delay Brexit day but there needs to be a “credible justification for a possible extension and its duration.”

Below is a simplified timeline of how Brexit would go:

Despite the rejection of May’s withdrawal agreement, GBP/USD managed to regain some of its losses after the initial fall. With the no-deal proposal likely to be rejected by the members as well, this is seen as a bullish sign to investors. We believe that as long as the 1.2940 price level holds, this pair could continue its uptrend.