Sterling made gains last night as Parliament voted against a “no-deal” Brexit in any circumstance. While ruling out no-deal was expected, the instruction was stronger than the government’s intention, which was to rule out a no-deal Brexit on March 29 only. Sterling drew comfort from the removal of the risk to a no-deal Brexit on March 29, but looks like it has yet to price in upside from the possibility of Prime Minister Theresa May’s deal eventually being passed or a softer Brexit.

What Happens Next

Today, British Parliament is voting on whether there should be an extension to Article 50 (which sets the UK’s current exit from the European Union (EU) at March 29), and the governing body is highly likely to vote for a delay. While it appears that the government would prefer a short, limited-time extension to June 30 for the purpose of passing a deal and the necessary legislation, it is only a request that the UK can make to the EU. Each of the 27 member states of the EU needs to agree to the extension, and they are unlikely to do so unless Parliament can demonstrate a consensus for a future relationship or a clear change in purpose for the extension. This will need to be done by March 20, in time for the European Council meeting on March 21, where any Article 50 extension will be discussed.

This opens the way for a third “meaningful vote” (MV3) on or before March 20, as well as possible indicative votes on alternative future relationships. The EU has made it clear that the final offer provided before meaningful vote 2 (MV2) – in which the UK was given added legal assurances that the Irish backstop would be temporary – was the UK’s second and last chance of getting any further concessions from the EU for Ms. May’s deal.

Potential Impacts of an Article 50 Delay

The only way now for Ms. May to get more support for her deal is the threat of a longer extension and possible referendum. Intriguingly, the EU’s response to the request for an extension, whichever way it goes, might actually help her deal to be passed. If the EU does not offer an extension, it will be good for her deal, as it will likely pass given the limited choices on the table. If the EU offers a long extension, it is also potentially good for the deal, making it more likely to pass given the complications of the UK having to participate in European Parliamentary elections in May, as well as the fact that a long period could dilute the chances of Brexit happening at all. While this may be enough of a threat to get support from the Eurosceptic wing of the Conservative party, Ms. May still needs significantly more votes to change the 149-vote defeat that she suffered on Tuesday into a victory. We do not, therefore, rule out a fourth attempt — MV4 — after the EU council meeting, if the defeat margin is narrowing.

In summary, there are clearly many more twists and turns to come. As for the markets, for now, they are likely to continue to be volatile, especially given the political uncertainty in the coming week. Ultimately, however, we think the possible outcomes now appear more positive for the UK and those in favor of retaining a constructive future relationship with the EU – something that we believe is yet to be priced in by markets.

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This article by Bethany Payne, CFA was originally published at