(Bloomberg) -- The pound may more than hold its poise if Theresa May's Brexit deal is rejected by a margin of fewer than 70 to 75 votes, analysts say.
A relatively small shortfall for the U.K. prime minister, who needs 320 votes to push the pact through Parliament, may kindle hopes that she could succeed in a second attempt and spur gains in the currency. On the other hand, a large margin of loss -- 100 or more -- would ignite risks from a no-deal Brexit to an early election or even a second referendum, driving sterling lower, according to strategists and fund managers.
The margin of votes is crucial since a change of heart by one lawmaker would widen or narrow the gap between ayes and nays by two.
Below is a compilation of views from analysts and fund managers on the different post-vote scenarios and potential pound reaction:
Barclays
- Rejection by 25 to 75 votes appears to be the currency's market's base case, strategists including Moyeen Islam wrote in a note
- Large spot reaction unlikely in this scenario, but risks are skewed toward depreciation and front-end volatility (2-4 months) is likely to stay elevated
- Rejection by less than 25 votes would lead to 0.5%-0.75% sterling appreciation on the day on expectation of an orderly Brexit
- If May loses by more than 75 votes, it would increase the risk of no-deal Brexit and lead to sell-off in pound
- A defeat by “less than 70 and May lives on to attempt to fight another day,” said head of Group-of-10 strategy Jeremy Stretch
- If she loses by 100 to 130 votes, pound would fall below $1.26, but if she loses by more than 150 votes, “we are clearly at risk of a leadership challenge and that could encourage a $1.24 test”
- Chief macro strategist Rupert Harrison says May still has a chance at getting her deal approved if the margin of loss is 30 to 40 votes
- There is possibility of “small tweaks, particularly to the future relationship document, maybe to parts of the withdrawal agreement,” despite EU leaders saying there isn't
- Defeat by a large margin would spur country to consider alternatives including arrangements on the lines of European Economic Area or FTA
- “Personally, I see a little wiggle room but not much -- it's quite binary for me,” said Neil Jones, head of hedge fund currency sales
- Says market will “probably buy pound on 300 votes, sell on 270”
- “270 or less and 300 votes or more are the market alarm point to sell or buy sterling”
- Sees pound rallying to $1.35 if May gets the majority 320 votes; at 300 it will probably rally to $1.30
- Sees sterling falling to $1.2250 if vote count is 270 or less for the deal
- “The key thing to watch will be the margin,” said chief economist Dean Turner
- “If its something more manageable in terms of numbers, not the 200 number people are talking about that's arguably a very different situation to a huge defeat”
- “If it's a huge defeat things become a bit more messy, we start talking about confidence motions etc.”
- “A defeat of 50, perhaps,” is manageable; “is a defeat of 100 manageable? Maybe.”
UBS Wealth Management
--With assistance from Charlotte Ryan.
To contact the reporter on this story: Shoko Oda in London at soda13@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma
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