Theresa May has won battle, but will lose war – Sterling positive medium-term

Prime Minister May Theresa May yesterday evening survived a Conservative Party leadership vote, in line with our forecast, by 200 votes to 117. She will likely remain in office but it is debatable whether she is still in power.

We now expect the delayed House of Commons’ vote on the draft Brexit deal to take place in the new year and are sticking to our prediction that MPs will vote against the deal with an overwhelming majority.

There has been much speculation as to what would happen in the days, weeks and months following a “no” vote in the House of Commons.

The immediate issue would be the magnitude of this majority against the Brexit deal and its impact on i) Prime Minister May’s leadership, ii) the path which the government and parliament ultimately adopt and iii) the outlook for Sterling and UK rates market.

We believe that regardless of the size of a “no” vote majority, certain much-discussed outcomes – namely early general elections, the UK exiting the EU without a deal and the UK negotiating a new Brexit deal with the EU – are very unlikely.

The probability of other outcomes – including a second parliamentary vote or a parliamentary vote on an amended bill – is likely to be more sensitive to the size of a “no” vote but is ultimately quite low.

Finally, a second referendum – which remains our core scenario – would be more likely in the event of a sizeable majority of MPs voting against the draft Brexit deal.

Sterling’s 3% fall in the past six weeks suggests that markets are still wrecked by Brexit uncertainty and concerns about the cost of the UK leaving the EU without a deal.

However, a potential path, even if tortuous, leading to the UK remaining in the EU has likely dampened Sterling’s pace of depreciation and would ultimately result in significant Sterling appreciation, in our view.

This is a summary – Read the full research piece here