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March 27, 2019

The Brexit Impasse Spills into Another Chapter

<strong>By: Franklin Templeton</strong>

The United Kingdom’s chaotic exit from the European Union (EU) took another twist last week as the EU granted the United Kingdom a short extension to Article 50.

While this allowed the UK to take a step back from the cliff-edge scenario of a no-deal Brexit on March 29, the EU imposed a number of conditions:

Brexit would be delayed until May 22 if the UK parliament votes through a withdrawal deal this week.

Brexit will be delayed until April 12 if the UK parliament does not vote through a withdrawal deal this week. Responsibility would then pass back to the UK government to come up with a way forward.

Over the weekend, UK Prime Minister Theresa May has held talks with some of the more ardent Eurosceptics within her party. However, reports early this week suggested the meeting had failed to secure the support May needs to get her current withdrawal deal through parliament.

Questions over May’s ability to remain as prime minister have resurfaced. However, two of the obvious candidates to succeed her—David Lidington and Michael Gove—have distanced themselves from the position, claiming now was the wrong time to change leader. If May were to be forced out of her position, we believe that would increase the chances of a general election.

Looking at the week ahead, we can expect several debates and votes, potentially including a third meaningful vote on May’s deal. All options will remain open to the UK until April 12, including a no-deal Brexit, the possibility of a further extension, or no Brexit at all.

However, a further extension would need the approval of all 27 EU member states and would mean the United Kingdom would be required to participate in the European elections in late May.

<h3><strong>Market Reaction</strong></h3>

Last week, the pound rallied in a knee-jerk response to the EU’s decision to push back the Brexit deadline, although this came after two days of weakness following commentary from French President Emmanuel Macron that the UK was set for a “chaotic no-deal” if May’s deal is rejected again.

While the pound was higher, some commentators believe the probability of a no-deal Brexit has now increased, and the probability of May’s deal passing has decreased.

To us it appears Theresa May’s unwillingness to ask for further concessions on the terms of the withdrawal agreement make her “my deal or no deal” stance clear. This is particularly concerning given that the market does not appear to be pricing in a no-deal scenario.

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