Market Extra: Just Weeks To Make A Deal — Whats Next For Brexit

With only two weeks to go until the next big vote in the British Parliament and less than two months until Brexit is set to come into effect, it feels like lawmakers didn’t move far from square one.

Here’s what’s next on the Brexit timeline.

In short, it’s crunch time for U.K. Prime Minister Theresa May, who will head back to Brussels to plead for changes in the existing withdrawal agreement that her Parliament rejected earlier in January.

On Tuesday, Parliament also rejected most amendments proposed to May’s deal. At the same time, lawmakers voted to rule out a no-deal Brexit and to replace the Irish border backstop with an alternative solution. While neither of these amendments are legally binding for the government, they give an indication of where May’s support in Parliament lies.

The gridlock between the EU and London is become tighter and tighter as they edge closer to the B(rexit)-day on March 29. The EU has said it is losing patience, putting renegotiations at risk.

Tuesday’s reaction by Donald Tusk, president of the European Council, appeared to back that. He said the deal now on the table is the only one available. European Commission President Jean-Claude Juncker echoed this stance on Wednesday.

The European Council is comprised of the heads of states of the members of the European Union, while the Commission, operating in Brussels, is the executive branch.

As evidenced by Tuesday’s vote, British lawmakers don’t want a hard Brexit either, hinting at the likelihood of a last-minute deal as all parties are collectively running out the clock to retain the upper hand.

So really, London has just bought itself a few more weeks to iron out some details. Other than that, not terribly much has changed.

The next “meaningful vote” by Parliament on either the existing withdrawal agreement or an amended version should May be able to secure one in Brussels this week, will take place on Feb. 13, in about two week’s time.

Besides the U.K., the likes of Germany and France are also worried about a hard, “no-deal” Brexit and the repercussions it could have for the European economy. Market expectations are that a no-deal Brexit will be avoided, which has put a floor under the ailing British pound GBPUSD, -0.0153%  in recent weeks, despite volatile flare-ups now and again.

The option of an extension of article 50 — the EU treaty article that triggered the exit from the Union — is also still on the cards, although market participants seem to become less convinced of its likelihood.

Nikolay Markov, senior economist at Pictet Asset Management, deems a last-minute approval of the existing Brexit deal without any amendments as the most likely scenario. That said, a no-deal hard Brexit outcome follows closely behind in terms of likelihood, according to Markov.

“For now, it is sufficient to say that the upcoming battle [between the U.K. and the EU] will probably keep the threat of a ‘no deal Brexit’ hanging in the balance right up until the 11th hour,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. “Sterling gains should therefore be limited.”

In fact, volatility will likely increase over the next two weeks until the mid-February vote, which will pressure the pound, especially against the U.S. dollar, said Tyler Griffin, currency specialist at payments firm OFX. “One more slip from Theresa May and we could see the pound hit the deck and fall back below $1.30 against the dollar,” he said.

Sterling last fetched $1.3063, little changed from Tuesday.

Then again, “U.K. assets including equities and sterling are cheap, with return on assets proxied by equity dividend yield and nominal bond yield suggesting the pound should be trading closer to $1.45,” wrote Morgan Stanley strategists led by Hans W. Redeker. “This is also evidenced by the limited fall in sterling on the back of the votes overnight, suggesting pullbacks in the pound offer buying opportunities, particularly as the probability of a no-deal Brexit remains small, in our view.”

The U.K.’s FTSE 100 Index UKX, +1.58%  ended Wednesday’s session 1.6% higher at 6,941.63. In the year-to-date, the index has gained 3.2%.

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