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BREXIT: LEGAL RISK OF BREXIT DEAL UNCHANGED AS MEANINGFUL VOTE LOOMS

The pound enjoyed one of its strongest days in recent history yesterday amid optimism that progress was finally being made on Brexit and that the prospects of a no-deal exit was diminishing, after the UK Prime Minister said she had secured "legally binding" changes in the Irish backstop arrangement following last-minute talks with the EU last night. However, sterling started Tuesday’s session on the back foot and then sold off by mid-morning, before bouncing back slightly. Ahead of the meaningful vote, due to take place in about an hours’ time from now, sterling was coming under renewed pressure again. Serious concerns have been raised that Theresa May has actually not secured the required changes MPs wanted. Attorney General Geoffrey Cox updated his advice on the backstop today, and concluded that the “legal risk of Brexit deal is unchanged”. Traders saw this as a clear sign that MPs would vote down the deal again.

What does it all mean?

In essence, the changes mean the Irish backstop is not likely to become permanent, which the Prime Minister argues is what MPs wanted after the parliament rejected her initial deal by a historic margin in January. However, the opposition Labour Party said the government has secured nothing new, while rebel Tory Brexiteers and the DUP are not convinced either.

So, it all hinges on what the DUP and rebel Tory members think of the deal because they had previously said that they not only wanted a time limit, but the whole agreement to be re-opened and renegotiated. That hasn’t happened, so it remains to be seen if they will vote in favour of the deal today. Judging by various comments from MPs that have hit the wires today, it looks like May’s deal will not be supported from this camp either.

What’s happening next?

If May’s Brexit deal is passed then the UK will leave the EU, as planned, on March 29 and will then immediately enter into the transition period. However, if her deal gets rejected again, another vote will likely take place on Wednesday on whether the UK should leave the bloc without a deal. And if that no-deal option is also rejected then MPs will vote again on Thursday on whether to delay Brexit.

If the Brexit deal is rejected again, don’t be surprised to see the cable dip below 1.30 again, as this would increase the likelihood of a no-deal Brexit. Depending on what happens next, we could see the mid-1.20s again over the coming weeks. However, a surprise victory for May could trigger a big short squeeze rally with 1.35 being a potential short term objective. In the short-term, traders may wish to watch these Fibonacci extension levels on this 60-min chart of the cable, where the price might head towards depending on the outcome of tonight’s vote.


Source: TradingView and FOREX.com

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