Brexit forecast, possible outcomes for the next month and GBP/EUR movements.

Good morning everyone,

As mentioned in yesterdays report, I wanted to explain what could happen over the coming weeks for those with exchanges that need to be completed by end of year or early January 2019. We now know the PM will spend the next couple of weeks trying to sell her Brexit deal to the UK public and, more importantly, the UK Parliament, warning that it is the best deal possible and that any other versions would hurt the UK economically. The vote in the House of Commons is now expected on December 11th and is expected to be rejected in its current state but then could be approved it on a second attempt amid market pressure, according to UBS Wealth Management’s chief economist Paul Donovan. He reckons that prediction is now the consensus view in financial markets. Thanks to Bloomberg here’s a rundown of how things are likely to unfold over the coming weeks, according to UBS’s house view, which Donovan set out in an interview in Brussels.

  • Tory dissenters and opposition parties, including Labour lawmakers, reject the deal, as the ambitious wording in the political declaration on the future ties is “not going to significantly change the prospects” of it getting through Parliament.
  • After it’s rejected, a vote of no confidence against the government “will almost certainly” be triggered, but is likely to fail, “as nobody wants no government with two weeks to go before Christmas and three months before a hard Brexit.
  • Donovan expects Tories to rally around May after the vote.
  • The EU is likely to offer a token gesture, some sort of cosmetic, minor tweaks to the wording, and a second vote on the improved offer will follow, in January. (The EU has made clear it won’t renegotiate.)
  • Labour will still probably oppose the new offer, but several Labour MPs will defy the party whip and support the agreement.
  • “The issue here is that a lot of members of the Labour party want a deal. But they need to show that they tried to bring down the government. They need to be able to go back to their constituencies and local party members and say ‘look, we tried and it didn’t work’. Then, in the national interest,’ we had to support the deal.”
  • For Donovan, because that sequence of events is now the consensus expectation in financial markets, the reaction to the first negative vote in the House of Commons may not be as severe, thus not raising enough pressure on MPs to support the deal in the second vote
  • “Market volatility would remind members of Parliament that there are consequences” of a no-deal scenario. Still, even without it, most lawmakers understand that a hard Brexit would hurt the U.K. economy.
  • If the agreement is eventually approved, the British economy will strengthen in the short-term, as investment, which has been delayed due to uncertainty, will pick up.

While the above is one analysts forecast as he see’s current market consensus on how things could play out over the next month there is still a possibility we may have another vote, another general election, Negotiated No Deal. Upon rejection of the deal on first attempt, one of the options will be to have another go with getting it through Parliament.

Take two on Vote through Parliament

The maximum three week window between the government's deal being defeated and the requirement on ministers to propose a way forward would see several alternative scenarios come into play. The prime minister could make a second attempt at getting the withdrawal deal through the Commons. Sir David Natzler said, in procedural terms, that would be possible. "The words might be the same but the underlying reality would be self-evidently be different", Sir David said. Brussels might be persuaded to tweak the political declaration on the future relationship to meet the concerns of MPs. (We could see the GBP/EUR weaken upon first rejection (€1.10’s- €1.11’s) but on 2nd attempt there should be more hope of it getting passed through parliament and leading up to it I would expect the market to be more optimistic which should see the rate move higher towards €1.13’s - €1.14’s).

Another Referendum

This may depend on the fallout from the first rejection through parliament. We could see panic on the markets and that might change minds in parliament.  MPs might suddenly shift in large numbers towards the idea of another referendum to break the Parliamentary impasse and open the possibility of stopping Brexit. At the moment, about 8 Tory and 44 Labour MPs have publicly committed to another referendum. The Labour leadership has said all options should remain on the table (including another referendum) and the SNP and Lib Dems say there should be one too. However, a second referendum can only happen if the government brings forward legislation to hold one and a majority in the Commons supports it. Theresa May is dead set against another referendum and it's hard to see an alternative Tory leader picking up that baton. (We could see GBP/EUR go both ways with this. Initially I would expect the rate to weaken due to the uncertainty surrounding the possible result (€1.10’s- €1.11’s) but as we have seen in the past, if the Polls show that a remain type option is leading then the GBP/EUR will strengthen and I would expect this years highs to be hit once again  €1.1550’s, however if the Polls show a close contest then I would expect the rate to linger anywhere from €1.11’s - €1.13’s)

A General Election

This is Labour's preferred outcome to the deal being rejected first or possibly second time around. There are two routes to a general election through the Fixed Term Parliament Act and both involve motions of confidence in the Commons. But as Dr Jack Simson Caird from the Bingham Centre for the Rule of Law says, "with the ticking clock of Article 50 it's very difficult to see that this represents a solution to the problem." That will be the other critical factor at play. Unless the government asks for an extension to the negotiating period (and Number 10 has ruled that out) the time for parliament and the government to agree a way forward is incredibly tight. The clock won't wait. (This in my eyes will be the worse case scenario as the result could open the door to even more uncertainty and will most certainly delay Brexit. (€1.08’s - €1.10’s). If May defies the odds once again and wins a majority without the help of the DUP or any other party then she’ll be in much better position to get her deal through parliament and I would expect the rate to test yearly highs of €1.15’s)

Negotiated No Deal

Another idea that has been floated is a "negotiated no deal" in the which the UK would ask the EU for a (paid) one year extension of membership before leaving on World Trade Organisation terms. Some Brexiteers might like the idea but it's hard to see Parliament supporting such a move - with or without an explicit vote. Because Parliament will have to come to a view. As Maddy Thimont Jack, from the Institute for Government think tank says: "We do have Parliamentary sovereignty and there are clear ways for Parliament to express a very strong political view. "I cannot see how a government can get through a legislative programme, for no deal, for example, if you don't have the support of Parliament." Theresa May might have neutralised the chance of defeat in the Commons if she had found a Parliamentary consensus for the Brexit she planned to negotiate right at the start of the process. Instead, she faces three fraught weeks and a vote that will define the country's future for many years. Right now, it looks like the government's deal cannot get through the Commons. But the mood in Westminster could shift quickly in the current pandemonium. (This is an even more difficult one to try forecast the GBP/EUR rate but if there is an extension then I would expect the rate to stay around similar levels we’ve seen all year (€1.11’s - €1.15’s)

Making a plan for next exchange

For anyone with upcoming exchanges and who haven’t told me already, please do let me know so I can set rate alerts to insure we don’t miss out on any unexpected spikes in the exchange rate. If you don’t have an account setup with me then please do this as soon as possible. There is no cost with opening, closing or maintaining the account and getting setup only takes a few minutes. I’m unable to hold or secure an exchange rate without an opened account and when we do see spikes higher in the exchange rate we always see a larger number of clients attempting to open accounts in a rush to try secure the rate. Please beat the rush and avoid disappointment by getting setup beforehand.

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