Pound Sterling: What will happen when Prime Minister Theresa May triggers Article 50

The act of triggering Article 50 is the event that investors have been waiting for

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All eyes will be on sterling this week as speculation mounts that Prime Minister Theresa May is poised to trigger Article 50, formally starting the two-year countdown to Britain’s divorce from the EU.

The act of triggering Article 50 is the event that investors have been waiting for. They’ve eagerly been speculating how much impact— if any— it will have on the already battered pound.

Sterling has endured a bumpy ride in recent months.

The currency is down about 18 per cent against the dollar since the EU referendum in June, with declines since the initial aftermath of the Brexit vote mainly sparked by concerns that the UK is heading towards a hard Brexit - in which access to the EU’s single market would be sacrificed in favour of tighter control over immigration.

Currency experts believe sterling is going to be volatile when negotiations kick off, although many predict it might not be a shock event.

Neil Wilson, senior market analysts at ETX Capital, said the reality of Brexit has already been priced into the currency.

“A lot of the downside is baked in already – the actual triggering of Article 50 shouldn’t do too much,” he said.

Economists at Morgan Stanley also believe the triggering of Article 50 shouldn’t deal a major blow to the currency.

“There may be many Article 50-related news headlines in the coming weeks but we believe that a lot of the negativity around Brexit-related economic data weakness is already in the price,” strategists said in a March 2 note.

A poll of more than 60 banks and research institutions conducted by Reuters that was released earlier this month also predicts that there will be no dramatic sterling moves once Article 50 is triggered, however those questioned also do not think that the the currency is about to recover sustainably.

Most economists predict the pound will trade at $1.23 against the dollar by the end of June, and drop to $1.21 in the subsequent three to six months.

A widely expected increase in US interest rates on Wednesday could also favour the dollar over sterling in coming months, accentuating the pound’s weakness.

"Though the dollar was down against peers this [on Monday morning], its overall strength looks likely to continue, especially if the hawkish Fed embarks on the rate hike," Paresh Davdra , chief executive and co-founder of RationalFX said.

Some economists are even more pessimistic.

Analysts at Danske Bank earlier this month said that they expect the pound to fall to $1.19 by the end of March.

 

And Deutsche Bank economists in early March predicted sterling would plunge to $1.14 by the end of June - this would be a new 31-year low for the currency, even including the flash crash that sent the pound plunging more than 6 per cent on 7 October.

The issue for economists is how to assess and judge what two difficult years of Brexit negotiations will look like.

Speaking to the Financial Times, currency strategist Jane Foley of Rabobank, said: “The longer the uncertainty over the UK’s future trading relationship with the EU lasts, the longer the potential downside pressure on investment spending, employment growth and inflation.”

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