If a Brexit deal on any reasonably foreseeable terms was agreed by the European Union and passed the British Parliament, the British Pound would almost certainly strengthen considerably.
The latest word from London is that a deal has almost been agreed between the U.K. and the E.U. and it seems that the issue of the Irish border is the major sticking point in the ongoing negotiations. It seems very likely that some kind of deal will emerge within days – the focus will then shift to whether the British Parliament will approve it, which is a very live and open question.
It is easy to forget that if the British Parliament does not approve any draft deal, and another deal is not agreed and passed (which would be unlikely), Britain will automatically leave the European Union in March and will then have to trade on World Trade Organization terms with E.U. member states, which currently take in approximately 44% of Britain’s exports. Most economists believe this would cause considerable short-term pain. The only thing which might avoid that would be the British government withdrawing its notice of Brexit to the European Union, but that would put the British government in an impossible position.
This means that the Brexit issue will almost certainly be decided in the British Parliament. The problem for the British government is that there will probably be no real majority for any deal they negotiate. The British government will be playing “chicken” with the British Parliament, because the alternative to a bad deal will be no deal.
There are several members of Parliament who will consider any deal “Brexit in name only”, and they will vote against any deal to try to secure “no deal”. However, there are an even larger number of MPs who would like to somehow stop Brexit, and they will be tempted to vote down the deal, particularly if it is too “hard”, in the belief that the Government would not have the political will and courage to press ahead with a “no deal” Brexit.
What this means is that when a draft deal is announced, which is likely to happen within the next couple of weeks, we will see the Pound spike up, but then it will probably trade in a very volatile way as attention will turn towards this bizarre game which will be played out in the British Parliament. The day of the vote will see extremely volatile trading, and if the deal is passed, the Pound will probably rise by a few hundred pips right away, whereas if a deal is voted down, it will fall by a lot.
Forex traders should keep an eye on this forthcoming Brexit showdown because there will be a strong, event-driven opportunity to profit from the likely volatility.