Why a heavy defeat for Theresa May's Brexit deal could see the British pound surge

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  • The UK House of Commons is set to hold a meaningful vote on Theresa May’s Brexit deal with the EU on Tuesday.
  • Macquarie Bank strategists expect it will suffer a resounding defeat.
  • Rather that weighing on the British pound, it expects it will gain strongly should such a result occur.

When the UK House of Commons votes on Theresa May’s Brexit deal with the EU later today, it’s likely to be defeated.

Macquarie Bank FX and Rates Strategists Gareth Berry, Trang Thuy Le and Thierry Wizman believe the deal will be rejected in a landslide result. However, rather than leading to renewed weakness in the British pound, they expect the pound will rally. Hard.

“It’s very likely to suffer a landslide defeat, thanks to resistance from the opposition benches, and a mass rebellion within Conservative party ranks,” the trio said in a note.

“At first glance that might sound like bad news for sterling, yet such a resounding defeat is universally expected, and will open doors to many alternative paths, most of which would be good for the pound.”

Rather than political chaos increasing the chance of the UK exiting the EU without a deal on March 29, known as a “hard” Brexit, Berry, Le and Wizman say the turmoil will likely reduce the probability of such an outcome occurring.

“We are consoled by two observations,” they say.

“First, the UK can revoke Article 50 notification at any time, and that’s something most MPs could agree to do even if they can’t yet agree on what to do after that.

“Second, the EU can extend the two-year window for negotiations that is currently due to expire on March 29th.”

So the Brexit deadline may not be a deadline at all, at least in the short-to-medium term.

As such, Berry, Le and Wizman expect the British pound will soar over the coming months, especially in the near-term.

“We expect sterling to trade substantially higher over the next two weeks, and our end-March forecast for Cable remains at 1.33, rising to 1.40 by end-2019,” they say.

The GBP/USD currently trades at 1.2870. That means Macquarie expects it to rally 3.3% by the end of March, and 8.8% by the end of the year.

Investing.comGBP/USD Weekly Chart

While there is no set time for the vote to take place, many believe it’s most likely to be held in late North American trade or before Asia markets reopen on Wednesday.

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