Three outcomes for Brexit
'You can't always get what you want', sang the rolling stones. True in life, true in trading and true in politics. At the moment those three categories are intersecting for the GBP. Theresa May wants something that she may not be able to get. Let's look at the likely scenarios for Brexit and see how we could handle them. The clock is ticking and the UK has until March 2019 until they have officially left the EU.
Situation 1: No Deal - GBP Negative
This is the Hard Brexit outcome. UK reverts back to it's World Trade Organization membership. The opportunites are then for the UK to strike it's own deals across the world. UK exports to the EU would have customs checks and taxes in the same way the EU currently imposes on the United States. The Brexiteers like this option as it has a large reward potential and it conjures up images of Britain going out into the world to seek it's own fortunes. However, critics say that this is going to be terrible for the UK and GDP will be hit hard. The uncertainty around this option mean that any hint of it being a likely outcome is negative for the GBP.
So, at the moment, this outcome is interpreted by the markets as GBP negative.
Situation 2: Deal - GBP positive
This is what Theresa May is aiming for. She wants proximity to the EU by allowing skllied migrants to access UK jobs and in agricultural goods. However, at the same time she wants Britain to keep control of its laws, border controls and finances, but while avoiding a physical border between Northern and Southern Ireland. It is crucial to avoid re-kindling sectarian violence in Ireland and the undoing of the Good Friday agreement to not allow a border to be re-established. Also the Northern Ireland DUP are key to Theresa May securing her conservative majority, so N.Ireland's concerns are going to naturally be high up on the UK's agenda.
The problem with this deal is that it is viewed as an impossible ask. I have not read one person who thinks May can pull this off. However, if she does it is GBP positive.
Situation 3 Stay in the EU- GBP positive
Bearing in the mind that the GBP has a 10-15% devaluation premium on it due to Brexit you could expect that to reverse and move some more in the event that the UK stays in the EU. However, for that to happen Britain would need to decide that via a referendum or a new general election. This is what Theresa May threatened her Tory rebels with in the vote on Tuesday night. If she had been defeated on the final vote the UK would have called a UK election and the GBP would have droppped sharply on the news. However, please note that although situation 3 is positive for the EU there is a big risk if a general election is called. It could mean that the Hard Brexiteers are elected (e.g. Boris Johnson or an alternative) and this makes sitaution one (see above) more likely, so the GBP would sell on the announcement of a General Election.
How to trade that old lady of thread needle street? Well, look at trading the headlines which move toward one or other of these outcomes. See here. What will happen? Who knows? Yesterday is history and tomorrow is a mystery. However, for those in the present there are plenty of opportunites to trade the reaction to the headlines.
Oh, and back to the Rolling Stones. 'You can't always get what you want...'
