The third day of debating continues in Parliament today on the withdrawal agreement and political declaration ahead of the hugely important vote scheduled for 11th December. This week has proved extremely testing for the Prime Minister after the Government was found in contempt of Parliament having refused to publish the full Brexit legal advice, which has since been provided. The pound fell to the lowest point since April 2017 against the dollar amidst the political uncertainty. The legal advice states that Britain could now unilaterally withdraw from this new treaty, something that has been described as a trap and has infuriated the Democratic Unionist Party which the Government relies upon.
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The vote next Tuesday holds the keys as to the next steps in the Brexit process but the political situation is in unchartered territory which is helping to weaken sterling. Although the Grieve amendment that the Government lost on Tuesday purports to give more power to Parliament on the terms of a final deal, the bottom line is that the default position remains no deal and this still carries the biggest risk for sterling. Andrea Leadsom highlighted the uncertain future when she stated that “the recent defeats by the Government could either make no deal more likely or indeed less likely.”
The former Bank of England Governor Mervyn King has written a damning piece on Bloomberg describing the deal as the result of “incompetence of a high order” and that the deal must be abandoned otherwise it will not be forgiven.
On the assumption that the Prime Minister loses the vote in Parliament, the first thing that will happen will be a plan in advance for a no deal scenario.
Much of the outcome will depend on how many votes she loses by. If the first vote is close then Theresa May would likely go back to Brussels for the summit on Thursday 13th December to look for concessions over the controversial backstop or move towards a different type of Brexit to try and win more support back home.
If Theresa May lost the vote by as many as 100 then there is a high chance that she would resign immediately. Anything less and Labour will likely call a vote of no confidence in the Government which could take place at Prime Minister questions the following day. If that doesn’t happen then the European Research Group will likely submit letters to the 1922 backbench committee to trigger a vote of no confidence. Theresa May could take the riskier option of calling for a snap general election appealing to the public to back her deal, which of course backfired the last time she did this. Whatever happens Theresa May has 21 days to return to the House and set out what she plans to do next.
Those hoping that Brexit will be over by March 2019 are likely to be disappointed as the way things are going could see Brexit dragging on indefinitely leading to more uncertainty for the British economy and hence the pound. There is already talk this morning that the Article 50 process may need to be delayed by 3 months to allow more time and some of Theresa May’s cabinet are insisting she delays the vote next week knowing that a huge defeat could see the Government fall. With such a wide spectrum of such grave outcomes the pound is being pushed lower.
The pound suffered another blow yesterday after UK Purchasing Managers Index data for the services sector arrived weaker than expected at just 50.4 against forecast of 52.5. Anything above 50 represents expansion in the sector so these figures take the sector close to a contraction and the lowest level since after the 2016 referendum. The continued uncertainty is having a negative impact on the services sector with business decisions being held back until the final destination of Brexit is clearer.
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