Nothing is more important this week that the Brexit votes on Tuesday, Wednesday and possibly also Thursday. There's no exact time for the vote but it will be after the debates, which usually end evening time in the UK.
For the vote, there are only 2 outcomes - members of Parliament will choose to back the withdrawal agreement or reject it. If they accept the deal, Theresa May's strategy will be vindicated, the UK will leave the EU on March 29th and GBP will soar for no reason other than a certain outcome.
While we could see a quick 1-2% rally, it may be difficult for the gains to be sustained as investors turn their focus to the consequences of leaving the European Union with no permanent trade agreements ad the challenges the UK will have in negotiating from a isolated position.
What's most likely going to happen however is MPs will strike down the deal. There's already reports that May's Cabinet rejected the EU's latest backstop proposals. May has been unable to convince the EU the change the Irish backstop terms and unable to get enough MPs to accept the current deal.
If the withdrawal agreement is rejected, May will hold a vote Wednesday on whether the UK should leave the EU with no deal. She's been insistent that no deal is better than a bad deal and if MPs feel the same way, then there's serious trouble ahead. This would be the worse case scenario for the GBP.
Bank of England Governor Carney warned us before that a no deal Brexit could cause a 25% collapse in GBP. While we don't expect that to happen in a blink of an eye, the sheer reality of a no deal Brexit will be enough to send GBP/USD down 2 to 4 percent in a matter of minutes.
Leaving with no deal is irresponsible. Most MPs feel this way, which is support for a no-deal Brexit should be minimal. GBP, which would have fallen on Tuesday after a rejection of the withdrawal bill could rally briefly in this scenario but then the focus shifts to the next vote on Thursday on whether Article 50 should be extended.
We continue to look for 1.10 in euro. Today's economic reports reinforce the central bank's concerns about weaker growth. German industrial production fell -0.8% in January as exports stagnate, causing the trade surplus to rise less than expected.
The ECB made it very clear last week that TLTRO 3 is a form of accommodation and they stand ready to do more if Brexit is disruptive or global growth slows further.
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