The following report looks at whether Article 50 will result in Sterling weakness or strength, looking in detail at what happens during Article 50 and how this may further impact the value of the Pound. The table below highlights the difference in exchange rates for GBP/EUR, GBP/USD and GBP/NZD within the last month.
|Currency Pair||% Change||Difference on £200,000|
Will the Pound rise or fall on Article 50?
The first day of spring sees Sterling trapped in familiar ranges for 2017. With just days until Article 50, the legal mechanism for the UK to leave the EU is triggered the calm is highly unlikely to last too long.
Commentators believe triggering Article 50 this week is unlikely but clients looking to buy and sell the Pound should be making plans as it cannot be ruled out.
This is not an event that markets can predict or forecast in normal fashion to say a Bank of England interest rate decision or economic data. The scope for surprise is clearly high and whilst undoubtedly Sterling weakness is priced and factored in currently, there is no clear view the Pound will rise or fall once triggered.
A positive performance for Sterling centres on any fanfare and statement from the Government that accompany the event. We may see the same sentiments evoked as Theresa May’s Lancaster House speech in January of this year. Back then Sterling was poised to drop but in fact rose 3% as the market embraced Theresa May’s vision. The removal of uncertainty over the future direction of events helped Sterling higher.
But that removal of uncertainty may also be detrimental too since it will confirm that Brexit really is happening. Sterling will once again be at the mercy of negative headlines. Speculation over the cost of the Brexit ‘bill’ to leave the EU and fears over the UK ending up bailing out with no deal at all could very conceivably neutralise any ambition the Pound displays in this period and send it lower back to the lows of October.
Nothing changes materially for two years
The one saving grace for Sterling is that any Brexit deal won’t come into force for a minimum of two years leaving plenty of time for the market to digest the news and receive forewarning. Nothing will legally change for clients buying and selling overseas property, nor businesses trading with the EU until a new deal is agreed.
Nonetheless the triggering of Article 50 is the biggest event to influence the Pound since the Referendum vote and clients buying and selling Sterling need to be prepared. Just looking at some of the forecasts on offer tells us why. GBP/EUR is seen at anywhere between parity and 1.21 in the coming weeks and months whilst GBP/USD is 1.15 to 1.31. Leaving everything to chance is not usually a good idea on the currency markets so making some plans in advance is wise.
Looking at this week’s data Inflation is a little more interesting than usual after the Bank of England last week hinted it may look to raise rates. Inflation has been rising on the weaker Pound prompting the Bank of England to consider raising rates. I feel overall this is unlikely but it might help clients buying a foreign currency with sterling before any excessive volatility once Article 50 is triggered.
Thursday we have Retail Sales and whilst these only account for 6% of GDP they usually carry weight as indicative of consumer activity at a time when markets are trying to assess impact of Brexit.
Conclusion for the Pound
Sterling is undoubtedly on a much better footing than the October lows. But the market is in a very similar position to just before that time when there remained big questions over what was around the corner and up ahead. Whilst the triggering of Article 50 may well see some spikes for the Pound overall I cannot help but think Sterling will find itself backed into a corner as markets are generally viewing Brexit as negative for the Pound.
We know from our experience that when the market has been flat for a period it opens the door to these large unexpected swings which can take the market by surprise so if you have any Sterling transfers pending, buying or selling, be sure to highlight your position to your personal broker here by calling 01494 725 353. Alternatively, if you haven’t traded with us previously, you can open an account here and one of our brokers will be in touch.