BNY Mellon: UK Update

17 december 2018

By Simon Derrick - Chief Currency Strategist

With little fresh emerging from last week’s EU summit, the next few days for the UK could proved important.

The current situation:

1: The default outcome from triggering Article 50 is a no deal Brexit on March 29.

2: Should MPs wish to avoid this the the most straightforward option is for Parliament to agree upon the already negotiated deal. However, there are 313 active lawmakers on the opposition benches and10 DUP MPs that remain opposed to the deal while 117 Conservative MPs registered their lack of confidence in Theresa May last week. Given there are 639 active lawmakers in Parliament, it appears the PM has a substantial task ahead in getting the 320 votes she would need to get Parliament’s approval to proceed.

3: While it is possible that the EU could provide some additional assurances or reopen negotiations, nothing that emerged from last week’s EU summit indicates that this should be counted on. It should also be noted that the UK PM reportedly told EU leaders on Friday that if she could not win any more concessions she might as well hold a snap vote by parliament on her Brexit deal this week.

4: There’s been some discussion of support for a Norway-style membership of the European Free Trade Association. However, questions have been raised by the BOE and others about the feasibility of such a deal.

5: It is possible that a vote of no confidence in the government could succeed but this seems unlikely given the numbers in Parliament. While a general election is the stated aim of the Labour party, there has been no move so far to call such a vote.

6: A second referendum can only happen if the government brings new legislation to hold one and secures the approval of a majority of MPs. While It’s thought there might be sufficient support at present for a second referendum should the Labour Party come out in support of one,  it isn’t clear that the government would be willing to schedule such a vote. Tweets from Cabinet Office minister David Lidington (de facto deputy prime minister) and the PM’s chief of staff Gavin Barwell on Sunday (following a report in the Sunday Times that they were discussing plans with opposition parties) indicate that this remains the case.

7: Trade Secretary Liam Fox told the BBC on Sunday: “Personally I wouldn’t have a huge problem with parliament as a whole having a say on what the options were (if the PM’s deal isn't passed by MPs). When you look at the options that we have, we have got to recognise that there are a limited number of real world options here.” Education secretary Damian Hinds also said he was open to the idea of “flushing out” the different options.

What happens next?

Conclusion

GBP remains stable above key levels against both the EUR & USD while the options market indicates a moderation of stresses following the failed motion of no confidence in UK PM Theresa May last. However, the environment remains challenging. Perhaps the one meaningful shift seen over the weekend was the support that seemed to be building for a free vote in Parliament on the options available. This suggests that the next four days could prove particularly busy.