Nearly three years have passed since June 23, 2016 when the referendum on the U.K. remaining in the European Union confirmed the desire of a narrow majority of Brits to abandon the bloc. However, a solution is currently still lacking to lay out the future relationship, and political uncertainty continues to condition the decision-making of investors and companies with exposure to the U.K.

The events that have taken place since the vote have not only confirmed the difficulty of finding a solution to the so-called “Brexit”, but have also demonstrated the division among British society, Parliament, and even the discrepancies within the political parties themselves. Supporters and opponents of the process remain embroiled in a battle that will affect future generations.

Theresa May was the latest collateral damage of Brexit. Barely two months after the date the U.K. was supposed to abandon the European Union, which was delayed until October 31st, the British Prime Minister announced her decision to resign from the leadership of the British government after the House of Commons rejected the agreement reached with the 27 members of the European Union for the third time. May announced that she would hand over her leadership of the conservative party on June 7th after her latest proposals to MPs to hold a second referendum and the resignation of Leadsom (her former opponent) proved to be obstacles more insurmountable than her three defeats in Parliament.

The big question now is who will replace her. Although the race for the leadership of the conservative party will officially start on June 10th, there are already some names on the table (Boris, Raab, Hunt, Brady). In terms of process, conservative MPs will vote to shorten the list of finalists to just two candidates. Then, all party members across the country will vote on the new leader by mail. The next British Prime Minister should be confirmed by the end of June.

"Now, there are a wide range of possibilities"

This context has caused the optimism shown by the British pound a month ago to fade and the EUR to GBP exchange rate to once again surpass 0.88. Now, there are a wide range of possibilities, including a scenario without an agreement, which has led to an increase in volatility and the depreciation of the pound compared to other G5 currencies. As we have observed in recent years, not just Brexit, but also during the crisis in peripheral Europe, President Trump’s “trade wars” and the clash between the European Commission and the Italian government over fiscal imbalances, political uncertainty tends to hurt local assets and have negative implications on the currency. Uncertainty is a factor that conditions businesses’ investment and hiring decisions, market expectations, and reduces investors’ appetite for taking on risk.

In the short-term, campaign headlines will start to dominate front pages. With candidates like Boris Johnson proposing a pragmatic Brexit while warning that the country must “prepare for a no deal”, it makes it difficult for investors’ fears to dissipate. In this  scenario, the pound should continue showing signs of weakness as the option of a hard Brexit would be on the table. However, it remains to be seen how the abysmal division in Parliament will be managed. Parliament has repeatedly voted against a no-deal departure in recent months and has underscored its intention to have the final word over the process.

We continue to believe that the most likely scenario is to avoid a disorderly U.K. exit from the EU. In fact, the Brexit vote did not propose a no-deal departure. However, there is a big difference between probability and certainty, so we always recommend hedging to reduce the risks from exposure to exchange rates for the different possible scenarios.

Despite all the short-term options including elections and a second referendum, the future of Brexit is completely binary. In other words, either there is some sort of agreement (or even remaining) or there is a disorderly withdrawal. In the former, the pound would have a margin of appreciation given that it is currently undervalued, and we could even reach a EUR to GBP exchange rate of 0.80. On the other hand, in a no-deal scenario, the pound would clearly have a margin of depreciation and the low points reached after the referendum would be a fairly likely target.