The drubbing that the main UK political parties (Conservatives and Labour) received in the European elections highlights the increasing polarisation of UK politics. Both took a fudged view on how to go about Brexit while the remainers including the Lib Dems and the hard brexiters led by the newly formed Brexit Part, garnered most votes. The outcome sends a clear signal of public frustration and impatience at the lack of progress in leaving the EU three years after the Brexit referendum.
A new leader of the Conservative party will likely steer towards a harder Brexit, but this may not resolve the impasse, something that has already brought down Prime Minister Theresa May. In any case it is unlikely that the EU will want to renegotiate the terms of the Brexit deal agreed with May just because there is a new leader. Divisions within the Conservative party itself continue to remain stark. In the meantime Labour leader Corbyn is under pressure to make a clearer shift towards remaining in the EU.
Parliament meanwhile, has already voted against allowing a hard Brexit, suggesting that it is going to be extremely difficult to deliver a no deal or hard Brexit without fresh general elections. However, as the European elections have shown, fresh UK general elections would spell doom for both the Conservatives and Labour unless they moved to harder stances on either side of the spectrum. The Conservatives may not risk such an outcome.
This leaves a second referendum as an increasingly viable option, one which would put the question of remaining or a hard Brexit back to the public and out of the hands of parliament. Indeed given the lack of alternatives and inability of parliament to move forward on Brexit, this may turn out to be the most prescient option although this runs risks of its own including fuelling demands for a fresh Scottish referendum.
GBP has continued to slide amid a clear lack of progress among politicians to arrive at a viable Brexit strategy and increasing risks of a hard Brexit. However, if markets see a growing chance of a fresh referendum, GBPUSD could reverse some of its recent losses as remain hopes are rekindled, possibly breaking back above 1.30 at the least. It is not by any means clear that remainers would win such a referendum, but at least they would have a chance that did not exist previously and that could be sufficient to give GBP a bounce.