FX strategists at ING note that once again, a session in the UK Parliament yields more questions than answers.
- "MPs gave initial consent to the Brexit Withdrawal Agreement Bill (with a solid 30-vote margin), but the PM’s proposed fast-track timetable was rejected. Johnson announced he will pause legislation on the deal whilst waiting for the EU27 decision on the Article 50 extension. The result was a drop in sterling as the prospect of another delay dented investor optimism for a quick resolution and likely increased the perceived risk of snap elections.
- At this stage, many options remain on the table. Johnson would ideally like a short-extension (a couple of weeks) to keep pressure on the House, but the EU may be little inclined to take such risk and will likely deliver a longer extension (possibly until Jan 2020). Once the length of the delay is set, Johnson will decide whether to try and go straight to elections – although it’s not clear Parliament will let him do this right now. Alternatively, he could press ahead with the legislation, where the next step would be for MPs to put forward amendments.
- Looking at the FX-impact, the current situation suggests that: (a) more uncertainty is being priced back into GBP; (b) the downside for GBP still seems quite limited given that Johnson now appears to have a majority to back his deal. In turn, the pound may drop some of the recent high volatility and get stuck in a “wait-and-see”, relatively tighter band, possibly hovering around the 1.28-1.29 area vs the USD."