News from Westminster that the Withdrawal Agreement will be put to a vote in the Commons at the beginning of June has brought the Brexit headache back for those investing in British assets.
The game of picking the likeliest Brexit outcome has re-emerged, however, this time around market sentiment has deteriorated substantially. With the withdrawal agreement up for a vote for the fourth time this year, Theresa May will be holding out for progress in cross-party talks.
Financial markets, on the other hand, are proving more impatient on a cross-party agreement breaking the current Brexit impasse.
Brexit Secretary, Stephen Barclay, is right to reference heightened risks to Brexit being revoked or a no-deal Brexit should the Withdrawal Agreement be rejected yet again.
The increased risk of such extremities occurring has prompted sterling to sell-off towards 3-month lows this afternoon, with momentum and risk pointing to a more prolonged fall.
Chart 1: GBPUSD pushes towards 3-month low
Risks are currently tilted to further sterling depreciation, regardless of whether the Withdrawal Agreement is ratified or not.
If opposition parties decide to pass the bill at the beginning of June, it is likely to be Theresa May’s last act as Prime Minister.
This would increase the chances of a Brexiteer such as Boris Johnson or Dominic Raab taking over the reins and potentially imposing a harder Brexit than the customs arrangement that is currently being floated.
This scenario would likely prove unpalatable for most MPs in Westminster and would increase the chances of a vote of no-confidence being triggered in Parliament.
Sterling has a track record of not fairing too well in the run-up to such events. Alternatively, the Withdrawal Agreement could fail to make it past lawmakers for the fourth time this year.
Another failed attempt by Theresa May would embolden opposition within the Conservative party and would likely see the 1922 committee intervene.
The only upside for the pound is if Labour gets a more entrenched commitment from May outlining that the government’s stance is to avoid reversing any previous commitments after June’s vote.
The chances of this remain slim, and the Brexit process looks set to approach another pivotal juncture. That said, should Labour find the commitments by the current government as sufficient, sterling will likely see the green light to rebound up towards the $1.34 level against the US dollar.