Today has been an eventful day. The day started with the ruling from the European Court of Justice confirming the UK can unilaterally revoke the Article 50 notification (which started the negotiations officially) without any changes to the existing membership terms. In the afternoon, PM Theresa May announced the Brexit vote, which was scheduled to take place tomorrow night, would be postponed. The reason was that May was set to suffer a heavy defeat, as around 420 members of parliament would have rejected the deal according to media reports. During her statement, May said she wanted to get “further assurance” from the EU that the backstop solution to the Irish border issue is only temporary. While some hardliners will think Brexit would still not be hard or clean enough, it may persuade some of the softer hardliners and the supporting party DUP from Northern Ireland to vote in favour.

PM Theresa May did not set a date for the vote. She argued that she needs time to talk to her European peers. Under the EU Withdrawal Act the government must make a statement to the House of Commons no later than 21 January on how to proceed if no deal is reached. The question is whether this has already been reached, as May already has presented a deal although not ratified yet. Close to 21 January seems like the earliest date for a vote, at the time of writing. Donald Tusk tweeted the EU27 leaders will discuss Brexit on Thursday to “discuss how to facilitate UK ratification” but that the EU “will not renegotiate the deal, including the backstop”.

What will happen from here? Well, basically things have not changed much from our preview released on Sunday, as she would have most likely lost the vote anyway. We still have sympathy for the idea that the deal may pass eventually but it is not a high conviction call. It is a big gamble for the hardliners to vote against it, as May’s deal is probably the hardest possible Brexit on the table right now (no majority for no deal Brexit in Parliament). Some Labour MPs will probably also soon realise that the dream of snap elections is dead and that Labour’s official stance on Brexit is unrealistic, as the EU would never accept it. The later the vote in the House of Commons is held, the harder it is for the politicians to reject it, because time would be limited to shift course unless the EU27 extends Article 50. While the probability of a no deal Brexit probably rose again today, the overall probability remains low, in our view, as there is no majority for it in the House of Commons. The probabilities of a Norway-style or second EU referendum have increased.

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In our main scenario, we still expect a ‘decent’ Brexit and we maintain the long-held view that EUR/GBP will break lower towards 0.83 when we get more clarification. But as we argued in our preview, Brexit will probably remain unresolved when we enter 2019, which should keep EUR/GBP volatile and range-bound for a prolonged period.

On Sunday, we raised our 1M EUR/GBP forecast to 0.88 (from 0.84 previously) and raised our 3M target to 0.87 (previously 0.83), as the big break lower may not materialise in the coming months. We stress, however, that we see risk skewed to the downside relative to our 3M target in case Brexit is finalised within the next three months. We have kept our 6-12M forecast unchanged at 0.83.


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