FxPro: Brexit vote preview

On Tuesday, there will be an important vote in the British Parliament, which runs the risk of becoming the loudest government defeat in modern history. In December, May canceled the vote due to heavy criticism of her Brexit plan. However, there is nowhere else to retreat, and the vote should take place tonight. We will try to consider the possible reaction of the British Pound.

For several days everything pointed at the high probability that the plan will be rejected, and now all the attention is focused on how strong the defeat will be. It is most likely that the number of supporters of the current plan will be 100 or 150 people less than opponents. Such an outcome may cause the least harsh market reaction, leaving sterling near current levels below 1.29.

The most dangerous situation for the pound will be a defeat with a difference of about 200 votes. This can be a serious blow to the British currency. In this case, the GBPUSD pair may decline to levels below 1.24, up to the area of multi-year lows near 1.20, where the pair was at the end of 2016 and at the beginning of 2017, during the period of greatest uncertainty around Brexit prospects. Politically, the situation will be very similar. After all, such a loud defeat of the government will mean that negotiations with the EU will have to be conducted anew from the very beginning.

Another option also cannot be ruled out: the defeat won’t be so loud, with a difference of 60 or less votes. This will be a signal to the markets that the British Parliament is close to a compromise agreement.

The upcoming vote is a mini-version of the Brexit referendum. Of particular concern is the similarity of the dynamics around GBP. As in 2016, the currency rose in recent days before the vote on speculation around a positive (for the pound and markets) outcome. However, such a false start then played a cruel joke with the pound, intensifying its collapse. Those who were the last to buy British currency were the first to sell it, quickly fixing losses.

Today it is worth paying attention to important levels. A fall below 1.25 and especially below 1.20 can dramatically increase the sale-off of the pound due to the triggering of pending stop orders. The opposite situation can also happen: an unexpectedly positive voting outcome can strengthen the British currency buying. A takeoff above 1.30 will support further sterling purchases and will provide it with a long rally if market participants decide that the worst is over.

Alexander Kuptsikevich, the FxPro analyst