The EU summit held over the week saw European leaders formally approve the UK’s withdrawal agreement as well as the “Future Framework” which will govern Britain’s departure from the EU.
Despite vocal protests from both France and Spain which threatened the likelihood of such approval being passed, the terms of the deal were eventually agreed upon after much discussion.
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However, the main risks to the deal being finally ratified stem from London and not from Brussels, as Theresa May’s biggest challenge will be gaining a vote in favor of the deal in her parliament. MP’s from across the political spectrum, including from within her own party, oppose the deal, though as yet there have been no unified alternatives offered.
The “final meaningful vote” as its been called will likely take place in mid-December before MP’s break for Christmas. If the vote is successful, the UK will then enter into the agreed transition phase beginning from the March 29th, 2019 departure date.
Deal Could Be Voted Down In Parliament
However, if the deal is voted down in Parliament, the whole thing becomes incredibly tricky. Worryingly, the chances of the deal being voted down are incredibly high.
The UK PM relies on the Northern Irish Democratic Unionist Party for a working majority in the House of Commons. The DUP’s ten MPs have said that they cannot support May’s Brexit deal. In addition, MPs from the Labour Party have also said that they cannot support the Brexit deal. Finally, around a quarter of MPs in the Prime Minister’s own Conservative Party have also said that they cannot support the Brexit deal.
It is worth noting here that the PM is not facing any unified opposition. Among the MP’s who are against a deal, there is a division in their own preferred alternatives. Some MP’s want a deal but want better terms, some MP’s want to leave the EU without a deal and some want to stay in the EU.
Opposition To Brexit Deal
In terms of the deal being voted down, there are two risks of varying severity. The first is that, Given the division within Parliament, it is likely that we see MP’s pursue modification of the deal especially when it comes to the “future framework” document which isn’t legally binding. In this scenario, we might see two or more attempts before the deal is passed through parliament.
The second and more dangerous risk, is that the deal is voted down in favor of a second referendum (on whether the UK should accept the deal and leave the EU, or remain) and thirdly, that the deal is voted down in favor of leaving the EU without a dealat all.
As the time of the vote nears, it will essentially boil down to whether those MP’s who are against May’s deal feel that leaving the EU with the deal on the table will be preferable to either of the other alternatives. Indeed, the hope is that enough MP’s from within May’s own party will eventually decide to back the deal as the prospect of the alternatives grow more prominent on the horizon.
What After Brexit?
If the deal is agreed, there is likely to not be much in the way of significant change to the UK economy. The Withdrawal Agreement has enough embedded optionality in terms of extending the “transition period” that we are likely to see that going on much longer than the currently projected one or two years.
However, political risks in the UK will deepen as MP’s draw battle lines over the deal, specifically around the Irish backstop issue. For now, the market waits to see whether this deal will be approved in Parliament or whether there is still more work to be done.
The market has reacted without fanfare to news of the EU summit, having seen the withdrawal agreement approved. The real decision will be made in parliament and until then we are likely to see the current range in GBPUSD persist. The support along 1.2693 is the key downside level while to the topside, the bearish trend line from 2018 highs is the first resistance with the structural high of 1.3304 above it.