The pound tumbled against all of its major peers as London traders sold the currency off once U.K. Prime Minister Theresa May received the go-ahead to trigger Brexit. What can we expect from the Pound in days to come?
Cause and Effect
This past Monday the British Parliament passed legislation allowing the government to invoke Article 50 of the Lisbon Treaty. The ruling clears the way for the Prime Minister to finally trigger Brexit and to start the lengthy talks with the European Union.
Sterling had a delayed reaction to the news, as market participants appeared reluctant to sell the currency during Tokyo trading hours. The sell-off came almost a day later, after Scotland’s announcement of a renewed bid for independence. As a result, Sterling fell as much as 0.9% to $1.2110 on Tuesday, its lowest since January 17th. The pound eventually managed to bounce back from that 7-week low, but remains contained by the $1.2150 region.
Technical analysis shows that the risk is towards the downside, with a break below the 1.2100 figure exposing the 1.2040 region. A recovery beyond the mentioned daily high could see the pair returning up to 1.2200, but a selling interest will likely surge.
Potential Challenges
The pound has been hurting ever since the U.K.’s vote to exit the European Union was announced. It has lost about 19% against the dollar since the momentous June referendum. Sterling has also demonstrate a tendency to drop after each new development in the Brexit process, no matter how predictable those were. There are two factors, however, that make the current situation particularly challenging for the Pound.
The first factor is the time-constraints Britain will have to face once the Article 50 is triggered. According to the Lisbon treaty, once the separation process is initiated, there will be a 2-year countdown at the end of which Britain will leave the bloc regardless of the deal it can strike. That means that the outcome of the negotiations will largely depend on EU members and Britain may have to settle for the terms they are offered.
Secondly, the Scottish unrest poses significant risk of constitutional upheaval and even an eventual disintegration of the U.K. If the Scots were to vote to leave early on in the Brexit negotiations, it would put U.K. in an incredibly vulnerable position, potentially bringing the national currency to a point of devaluation.
Experts Speak
“[The triggering of Article 50] increase headline risk, particularly as the opening negotiating positions of the two sides are far apart. This may shift attention back to the UK’s large current account deficit … it does not bode well for sterling.”
John Wraith, head of UK Rates Strategy & Economics at UBS.
“I’m seeing early sellers out of Europe. I suspect more a case of pre-Article 50 jitters and to a lesser degree the Scottish referendum. Risk in general is holding up so I suspect the combination of Fed policy and political uncertainty are the main culprits.”
Stephen Innes, a senior currencies trader at Oanda Corp. in Singapore.
“This [situation] could unleash a whole new catalog of uncertainty about the U.K.’s future relationship with the EU many of which could be detrimental to investor confidence.”
Jane Foley, a senior currency strategist at Rabobank International in London.
