Brexit update: UK parliament opts for an extension

After an eventful week in parliament, the Brexit ball is set to keep rolling as MPs move to extend the 29 March deadline.

The British Parliament concluded a series of votes on Brexit this week with an intention to extend the 29 March Brexit deadline. What remains unclear at this point is whether the UK will seek a short (two months) or a longer extension (two years). It is also not clear what this extension would be used for. A longer extension would help to fundamentally rethink and rejig the Brexit strategy, including potentially leading to a softer Brexit than the one sought by May in her initial deal with the EU. That said, we remain in flux about what exactly will happen during a long extension, and particularly what would help break the logjam (new elections? a referendum?).

If the formal vote on the extension fails, we will face a no-deal Brexit on 29 March. Parliament’s vote to exclude the option of a no-deal Brexit was mostly symbolic. Meanwhile, Prime Minister May will hold a third parliamentary vote on her Brexit divorce deal ahead of the EU Council summit on 21-22 March 2019, where an extension will be formally discussed. All EU countries would need to give their consent to an extension, but we do not think this will be a major sticking point. That said, European officials dither about the format of the extension. Donald Tusk of the EU Council said he favoured a longer extension, which in his mind would facilitate the redirection of Brexit (and perhaps hopefully in his view, in closer proximity with the EU than May’s deal).

From a FX perspective, we remain cautious on a three-month horizon with a projection of USD1.32, given an extension could weigh on economic activity. Furthermore, in the absence of a credible alternative, the no-deal Brexit remains the default course even in the case of an extension.

GBP/USD Exchange Rate 2018-2019

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