British Pound Charges Higher: Why the Supreme Court Ruling was Quickly Forgotten by GBP

• The Pound to Dollar exchange rate has risen to 1.2569, the best rate since December 14, 2016.
• The Pound to Euro exchange rate has risen to 1.1715, the best rate since January 6.

Pound Sterling is in command on foreign exchange markets despite suffering some turbulence around the release of the Supreme Court ruling on Brexit.

We wrote at the time that the declines were not going to last, and subsequent price action confirms our suspicions.

The UK currency initially slipped against the Euro and US Dollar following a ruling by the UK’s Supreme Court that the UK Government has to consult Parliament on triggering Article 50 of the Lisbon treaty which allows for the exit from the EU of a member state.

This ruling was expected and priced into the Pound but that there has been some volatility confirms that this politically-charged currency will continue to be dominated by the ebb and flow of Brexit new.

Sterling edged higher during the opening remarks made in the judgement; however when the Court revealed devolved administrations would not have to be consulted on the Brexit process the currency slid.

The fall in the Pound on this aspect of the ruling suggests markets would have liked the Court to find otherwise - the thinking being that Scotland and Northern Ireland would try and block Brexit.

At the least, input from the devolved administrations would have likely resulted in the softest of Brexits as they would seek to remain in the single market.

However, we would argue that this outcome was also priced into Sterling ahead of the ruling therefore don't believe the decline will be too deep at this stage.

There appears little chance of the Brexit process being delayed.

Crucially the ruling does not render the UK’s eventual exit from the EU any less likely. The government is said to have been prepared for the outcome, drafting a short enabling bill which is expected to pass given its majority in the House of Commons.

Though the Supreme Court unanimously rejected the Scottish government’s attempt to be formally consulted on the triggering of article 50, the Scottish National Party has set itself on a collision course with the Westminster government over Brexit.

The SNP have said they will table 50 ammendements to the Bill when presented to Parliament on Thursday.

This could in fact be positive for Sterling - any ammendments from the SNP are likely to lead us down the path to a softer Brexit - watch for some surprises here.

And the main opposition Labour Party is also calling for amendments.

“Piloting such a controversial piece of legislation through parliament was always going to be tricky – but in the face of such determined resistance from the opposition benches, it will be a Herculean task," says David Lamb, Head of Dealing at FEXCO Corporate Payments.

As a result, Lamb believes Sterling is to endure another week of yo-yoing fortunes.

"The confirmation of the markets’ predictions brought only fleeting relief before uncertainty over the future course of article 50 returned with a vengeance. The gains made by the Pound on Monday were quickly eroded as sterling returned to its familiar pattern of ‘two steps forward, three steps back." says Lamb.

Pound Sterling Predicted to Move Higher

Aside from discussions about where power lies in the U.K’s constitution, the judges the Supreme Court ruled that  the Government cannot trigger Article 50 without Parliamentary approval and the original ruling of the High court would stand.

This was generally expected by the markets as Theresa May lessened its impact last week in her speech by stating that both Houses of Parliament would have to ratify any final Brexit agreement.

“Aside from a 20 pip spike on the judgement, movement in Cable has been minimal on the day and we are back to overnight levels. In the bigger picture, we have seen a huge bounce in cable off its flash crash lows up over 500 points. The stage is now set for cable to move higher to the next big resistance zone at 1.2750," says Jamie Dutta, Senior Market Analyst, Faraday Research.

Dutta does remind us that we do have UK GDP on Thursday and PM May’s meeting with President Trump on Friday.

Analyst Chris Beauchamp at IG in London agrees with the view that Sterling can still move higher.

Commenting following the decision, Beauchamp says:

"Big news has come in thick and fast this morning, on both the corporate and economic fronts. The overriding event has been the Supreme Court’s decision on Brexit. The court’s decision saw heightened volatility in sterling crosses, but ultimately cable remains pretty much where it started the day.

"Having gained over 4.5% from the pre-speech lows last week to the overnight highs above $1.25 some weakness was to be expected, but overall market positioning still seems to be broadly short on the pound, and thus there is plenty of scope for short-covering to push the price higher."

But Not Everyone is Convinced

However, not all analysts expect the Pound to march higher.

Viraj Patel with ING in London says he believes uncertainty has only increased as a result of the ruling - and Sterling hates uncertainty.

"Amendments and blockages by opposition parties to any Brexit bill proposed by the government will only slowdown the process of the UK leaving the EU. This will prolong uncertainty; price action since the Brexit referendum confirms that uncertainty is unambiguously GBP negative," says Patel.

Strategically, ING remain bearish on GBP/USD and see risks of a move down towards 1.21 over the coming weeks - especially once markets reconnect with the idea of Trumpflation.

"Initial support comes in around the 1.2430/40 area, though we would expect this to give way, with fresh bearish GBP bets leading to further downside," says Patel.