After a tumultuous, historic Saturday session in parliament, which saw UK lawmakers vote to delay Brexit once again, and culminated with PM Boris Johnson sending a bunch of letters to Brussels minutes before the deadline, notifying the EU that Parliament had voted to request another Brexit extension even with the Prime Minister saying in a separate letter not to grant that extension, the pound opened for trading around 0.4% lower, trading in a range between 1.2910 and 1.2940.
This happens as The Sunday Times reports that the European Union will delay Brexit, which as a reminder was vote on in the summer of 2016, well into 2020. An extension will be granted until February if Boris Johnson is unable to get his deal past MPs this week.
Diplomatic sources said that the delay would be “fungible” meaning that Britain could leave earlier, on the 1st or 15th of November, December or January, if his deal is ratified before the extension ends.
No decision will be taken until EU governments can assess the chances of the withdrawal treaty getting through parliament, not before Tuesday this week.
Separately, the Times reports that if BoJO runs into serious trouble or MPs force a second referendum then countries led by Germany will push for a longer extension, possibly until June next year. At that point, it will be 4 years after the Brexit vote took place, with extension after extension clearly the name of the game until the British population just gets fed up and votes to undo the outcome of the first Brexit vote.
Needless to say, another extension is merely a continuation of the status quo, and despite the vocal opposition and frenzied activity by Boris Johnson to change said status quo, Goldman Sachs sees the outcome of the weekend’s events as favorable for sterling.
As Goldman’s FX strategist, Zach Pandl, writes on Sunday afternoon, Goldman’s expectation is that “this week (most likely on Monday or Tuesday), the PM’s deal will be voted on and pass through parliament, with sufficient support from the ERG and a small minority of Labour MPs.” As a side note, it wouldn’t be the first time an overly optimistic Goldman assessment is railroaded by fantastically unpredictable UK lawmakers. But we digress: as Goldman adds, “the EU will likely defer any decision on extension until after votes on the deal and surrounding legislation have been held. In our view, it would be very unlikely for the EU to deny the extension request in extremis, although injecting some ambiguity into the process this week may be a helpful device to funnel MPs towards the PM’s deal.”
At the same time, Goldman’s economists have turned even more optimistic on a favorable outcome, and in a separate note they write that “just as Parliament’s desire for insurance is best served by deferring a decision on the deal proposed, it may well be that the EU-27’s desire for resolution is best served by deferring a decision on the extension requested. We think the Johnson administration will use that space to prove that it has the numbers for its new Withdrawal Agreement. After all, only by passing the legislation required to implement the deal will the government convince concerned MPs that it has permanently ruled out the prospect of “no deal.”
While developments over the weekend certainly puncture some of the Prime Minister’s political momentum, we think they also reveal that the PM can command a stable cross-party majority in favour of his Brexit deal. In our view, the decisive test of that deal has been postponed by a few days; the deal has not been defeated.
As a result, Goldman now sees the odds of a “no deal” dropping from 10% to just 5%:
As for our baseline path, we maintain the view that the UK will leave the EU on 31 October. On terminal outcomes, we lower our “no deal” probability from 10% to 5%, we leave our “no Brexit” probability unchanged at 25%, and we revise up the probability we attach to a ratified deal from 65% to 70%.
What does this mean for Sterling according to Goldman?
According to the bank whose FX trading desk has been one of the worst on Wall Street in recent years, “GBP has further to rally on a ‘deal’ outcome, and we maintain our long GBPUSD recommendation. We revise up our initial target of 1.30 to 1.35.” While that may be just the kiss of death sterling needed, here is how Goldman justifies its bullish take:
We think ‘no deal’ risks have diminished as a result of the extension request, and at this week’s open, we expect any initial fall in GBP as a result of disappointment that the deal has not passed this weekend to fade as the deal has been deferred, not denied. As a result, any fall in GBPUSD this evening will be limited to 1.27-1.28, which should be bought.
Even so, Goldman concedes that risks remain, even if it now sees these as more palatable for GBP than a ‘no deal’ outcome.
- First, the deal may fail to pass in which case GBPUSD will likely retrace to around 1.26. We do not expect a return to the low 1.20s given the high likelihood of an extension.
- Second, MPs may amend the deal and surrounding legislation to include either a second referendum, membership of a customs union, or fresh elections. Our base case is that neither amendments would succeed, however successful passage of each would impact GBP. A successful second referendum or customs union amendment would see GBP higher, although the precise response of the UK government is unclear and would introduce additional uncertainty.
For those who are not convinced by Goldman’s bullish take, this is what the bank sees as the main downside risk for cable: a successful amendment for an election, although as Goldman notes even this risk is diluted with both sides “likely to be offering equivalent or softer forms of Brexit.”
Goldman’s conclusion: “no deal’ risk is unlikely to increase meaningfully, capping the downside for the Pound.”
Check back in a few weeks to see if Goldman finally got one right…