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Sterling rips higher on last-ditch Brexit deal tweaks

John Hardy

Head of FX Strategy

Summary:  At the very last minute, Prime Minister Theresa May agreed to a new version of her deal that has brought real concessions from the EU on the backstop arrangement. Sterling has jumped in response, but are the new terms enough to win over sufficient Eurosceptic Tories in a vote today?


Today’s update is a quick one on Brexit, which will dominate the market's attention today after Prime Minister May's new, last-ditch agreement terms established late last night ahead of tonight’s vote on the deal. In the interim, as we discuss below, an opinion on the new deal terms will be issued ahead of the vote from Attorney General Geoffrey Cox, and many may take their cue on voting from his stance. 

It's safe to say that if this deal fails to pass today’s vote, it could lead to extremely large downside moves in sterling due to the difficulty of the delay option and heightened risk of a no-deal Brexit that this could bring. The outcome is rather binary; a yes vote could also lead to a very chunky rally, although perhaps a less disorderly one than the downside option.

May's new deal

The changes made to Prime Minister May’s original Brexit deal represent a new turn in the ongoing Brexit saga, though they still fall short of what she promised when going back for renegotiation. The difficulty with the new terms is that they still don’t indicate exactly what Brexit will look like in the long run, but the “worst” aspects, from the perspective of maintaining the UK’s sovereignty, were in part addressed.

This article gives a good breakdown of the specifics, which are mostly guarantees on a process by which the two sides can address bad-faith trade negotiations. The last couple of bullets in the article are the most interesting, as they represent the UK’s attempt to apply an interpretive statement indicating its ability to withdraw from the backstop arrangement entirely if it felt such a move necessary; it says that if the two sides aren’t able to conclude a free-trade deal that supersedes the backstop, stating “nothing in the Withdrawal Agreement would prevent it from instigating measures that could ultimately lead to disapplication” of backstop obligations.
 
One can’t help but think that the EU was deliberately waiting to the very last moment to apply maximum leverage in getting this deal through, making the consequences of not passing the deal difficult to swallow on the threat of the ensuing chaos. 

Today, we will be awaiting the vote itself, but given the difficulty for everyone in understanding all of the implications of this still-complex deal, a legal opinion from the UK Attorney General is the most highly anticipated “next step”.

As for the consequences of the deal failing tonight’s vote, Brussels' position is that Brexit can be delayed until May 24, the day after EU Parliamentary elections are set to be held, “but any extension beyond this date would require the bloc’s leaders to clarify the legal consequences of Britain not participating in the elections, because the UK would still be a member state”, per the FT.

The European Commission has briefed EU27 ambassadors that Brexit could be delayed until May 24, the day after European elections are due to start. Any extension beyond this date would require the bloc’s leaders to clarify the legal consequences of Britain not participating in the elections, as the UK would still be a member state.

Chart: GBPUSD

Within 24 hours, we could be trading far far away from current price levels as this ugly Brexit process finally reaches a key binary outcome. The consequences of a “yes” vote today on May’s new deal terms are quite clear, while the consequences of a “no” are not, Whatever the uncertainties, however, all parts of this process remain very consequential for price action given the sterling rally on hopes that a breakthrough is possible. We might be trading well above 1.3500 or below 1.2500 in tomorrow’s session. Traders need to tread carefully.
Source: Saxo Bank
There isn’t much of an “elsewhere” at the moment for currency traders, but we did just see a profoundly risk-on session yesterday that has set the tone for risk appetite after last week’s rather heavy selling. The Brexit vote presents asymmetric risks to other markets outside of the UK – a bit of a boost on the positive side if the vote passes and a much larger negative blow if it doesn’t as the market starts to fret UK and deeper EU recession scenarios.

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