Tonight’s vote on Prime Minister Theresa May’s Brexit deal is arguably the most pivotal moment facing the pound since the morning of June 24 2016 when the result of the referendum vote was announced.
The vote in the House of Commons is expected to be defeated, but the ramifications of follow-up votes on Wednesday and Thursday night could signal the start of a ‘Hell Week’ for sterling. The currency has been broadly stable since the Prime Minister’s last defeat in the Commons, but as we approach the final days of Brexit, turbulence around the pound may increase dramatically.
Much like Dante’s Inferno, there are several levels of hell that sterling could experience this week, all of which will affect the country’s army of SMEs in some way, particularly those who rely on import and export business.
Tuesday 12 March: A vote for May returns GBP to pre-Brexit levels
A vote for May’s Brexit plan is perhaps the most unlikely scenario, but it is the one that would be the least painful for the pound. If MPs vote for Theresa May’s revised deal, which by all accounts has had few revisions other than a second proof, then it would likely send GBP rocketing back to pre-Brexit levels. In this scenario, GBPUSD would reach $1.42.
SMEs exporting goods and services abroad would almost certainly feel an immediate benefit from the more favourable foreign exchange rate. In effect, theirs exports would receive a 10% uplift in value. But remember, this scenario is highly unlikely.
Wednesday 13 March: No-deal sends pound to 33-year low
The vote on March 12th is likely a formality, so attention will immediately turn to the pivotal no-deal vote on March 13th. A result in favour of a no-deal Brexit would be a huge shock and would likely send GBPUSD down to $1.15 – a 13% drop to levels we haven’t experienced since March 1985.
For SMEs, a no-deal vote would have serious long-term implications. The UK would be set to crash out of the European Union. The disruption to supply chains on the Continent would be extraordinary and many would likely find themselves in the unenviable position of renegotiating contract terms or even worse, terminate existing agreements.
But again, this is an unlikely scenario. If MPs vote against a no-deal to take it off the table, we would likely witness an immediate relief rally to $1.36.
Thursday 14 March: Little change, but a big extension will help GBP
If Parliament refuses to back a no-deal Brexit, MPs will be asked to vote on the length of an extension to the Brexit timetable. In reality, a short extension has been fully priced since the government’s first defeat in the House of Commons on its Withdrawal Agreement plan. It would likely see GBPUSD fall back to $1.30.
A longer extension, one that exceeds six months, would likely see a similar reaction to MPs voting for May’s deal, albeit slightly more muted. A long extension works in the Prime Minister’s favour by giving her another carrot to dangle in front of Brexiteer MPs to entice them into voting for her deal.
On balance, a longer extension is good news for sterling, although it would not prompt a slew of new investment into the UK economy, unlike a vote for the Prime Minister’s deal.
For SMEs – the length of extension will not change their current circumstances or remove long-term uncertainty. A delay, as the Prime Minister has been at pains to emphasise, doesn’t negate the chance of the UK leaving the EU without a no-deal. Instead, it changes the date by which a deal needs to be sought, which could vary from as little as 60 days to two years.
The last two years of negotiations boil down to the next three days. Sterling holders or buyers should be ready for the volatility that ‘Hell Week’ will throw at them – there is almost certainly more twist left in the tail. For SMEs, there is still no guarantee that they will receive the clarity they need this week.