Pound Sterling Tipped to Maintain Positive Tone Against Euro and Dollar as Warm Words by May and Tusk Help Confidence
Above: UK Prime Minister May announces Article 50 of the Lisbon Treaty has been triggered to the UK Parliament, her concilliatory tone helped aid a recovery in the Pound.
- Reference rates (30-3-17):
- Pound to Euro exchange rate: 1.1566
- Pound to Dollar exchange rate: 1.2438
The Pound was seen under pressure early on Article 50 day but quickly recovered much of the ground it lost and actually proceeded to hit a fresh daily high against both the Euro and US Dollar after the UK triggers Article 50 of the Lisbon Treaty.
The Pound moved higher as Prime Minister Theresa May addressed the UK Parliament and confirmed her country is leaving Europe.
But the tone of her address was concilliatory, realistic and respecful for her opposite numbers in Europe.
"PM Theresa May’s letter triggering Article 50 and the EU’s initial response have set a generally positive and co-operative tone to the beginning of the UK’s exit from the European Union," says Jonathan Loynes at Capital Economics. "May went out of her way to stress both economic and security co-operation – presumably an attempt to underline the UK’s broader bargaining position."
Meanwhile, Donald Tusk, President of the European Council has addressed reporters saying "already we miss you" when reflecting on the occassion.
Regarding upcoming talks, the European Council noted in a statement:
"We will approach these talks constructively and strive to find an agreement. In the future, we hope to have the United Kingdom as a close partner."
May committed to helping strengthen Europe despite the UK's exit and argued for the Europeans to strive for a mutually beneficial trading partnership.
"There should be no reason why we should not agree a new and special agreement between the UK and EU that works for all," says May.
There has been much focus on Sterling's behaviour over the course of the day by the nation's media with some hyperobolic coverage to say the least.
That Sterling is pretty much well within recent ranges tells us something - traders were intent on 'selling the rumour and buying the fact'.
For Jasper Lawler, a market analyst at London Capital Group, the way markets react to Brexit news has morphed over time.
"It would seem currency traders are going through the grief process," says the analyst. "Talk of a hard and soft Brexit was the denial. The October ‘flash crash’ was the anger. The surge after Theresa May’s speech on January 17 looks to have ushered in the final stage of acceptance. The now nullified threat of another Scottish referendum was a wobble that Sterling survived."
Article 50 finally getting triggered should help remove some uncertainty in the UK at a time when Trump and Le Pen are piling it on in the US and Europe; and this could actually help Sterling.
Traders appear to maintain ground until real details from the negotiating process are revealed so we should expect recent ranges to be maintained.
The recovery in Sterling keeps alive the predictions made by the more bullish analysts out there that Article 50 could well trigger a more sustained recovery in Sterling as clarity on the UK's future is finally revealed.
“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.
Also looking for further strength is Fawad Razaqzada at Forex.com:
"I am on the lookout for short-to-medium term bullish price patterns to form on the GBP/USD and other GBP pairs in the coming days."
But the analyst does caution that those with an interest in this market remain wary of volatility.
"Price action is already starting to look bullish, though while inside the range, expect to see further choppy price action as clearly a lot of people are still bearish on the Pound."
Bank of America: Article 50 Irrelevant, what Comes Next Matters
Meanwhile strategists at Bank of America Merrill Lynch Global Research have updated clients on their views pertaining to Sterling's outlook.
"Our bias remains for renewed GBP weakness at the higher end of the 1Q17 technical range, but we are cognisant of the ongoing positioning unwind, positive April seasonal factors which has seen GBP rally in every April over the past twelve years and unconfirmed technical base," says a note from Kamal Sharma, FX Strategist at BofA Merrill Lynch.
Therefore, those watching Sterling could do well to allow it to advance a little further as the Article 50 triggering, "does not itself provide the catalyst for renewed GBP weakness".
But, upcoming Brexit negotiations could undo the currency.
"Market complacency on the ability of the UK and EU to strike a comprehensive deal within the timeline with the least political/economic disruption is the motivation for a move back towards the bottom end and test of the trading range," says Sharma.
So while a move towards the lows of the range can be expected we note that no crash to fresh multi-year lows are envisaged.
How Will Currency Traders Play the Coming Hours?
Above: Prime Minister Theresa May. Credit: Jay Allen. Copyright: Crown Copyright
With Prime Minister May having announced Article 50 has been triggered, how should those with an interest in the foreign exchange markets approach Sterling through the mid-week session?
Kathy Lien, Director at BK Asset Management offers her views:
"The first way is to sell Sterling ahead of the event in anticipation of profit-taking. If you are in deep profits, you could hold through the event on the premise that the knee jerk move will be lower in GBP/USD. But profits should be taken quickly as a reversal could be swift and aggressive.
Above: The Pound to Euro exchange rate has been rising of late, but nerves have begun to show over recent hours. Keep in mind that the short-term uptrend is not necessarily over.
"The second is to wait for the market to settle after the initial move and buy GBP/USD for a brief recovery as some economists and traders are likely to argue that the final exit is 18 months away.
"The third option is to hold off a bit longer, an hour or two, let the market digest the announcement and ride the trend that transpires as it is likely to have continuation throughout the NY and Asian trading session.
“It is important to remember that GBP/USD can be a very trending currency pair after a big event with moves that can last for days so the smartest trade may be to wait,” says Lien.
Upcoming Milestones that Might Influence the Pound
Prime Minister Theresa May announced in the House of Commons Wednesday afternoon that she has invoked Article 50 of the EU's key treaty, triggering a two-year countdown to Britain's exit.
May's told lawmakers that the U.K. is embarking on a "momentous journey" and should unite to forge a "global Britain."
We await the EU's initial response which should come from Donald Tusk in early afternoon.
Looking ahead, the following dates could be key for the Pound:
29 April - EU summit of the 27 leaders (without the UK) to agree to give the European Commission a mandate to negotiate with the UK
May - European Commission to publish negotiating guidelines based on the mandate the EU leaders give it. The EU might say something about possible parallel negotiation on a future EU-UK trade deal
May/June 2017 - Negotiations begin
Autumn 2017 - The UK government is expected to introduce legislation to leave the EU and put all existing EU laws into British law - the Great Repeal Bill
October 2018 - Aim to complete negotiations
October 2018 and March 2019 - The Houses of Parliament, European Council and European Parliament vote on any deal
March 2019 - UK formally withdraws from the European Union (The Article 50 negotiations could be extended, but this is subject to the approval of the other 27 EU member states)
