What caused the Pound to begin the week badly?

Sterling begun the week on the backfoot and dropped against most major currency pairs yesterday morning, with the currency hitting a 2-week low on a trade weighted basis. The Brexit and its effects on the UK economy had been out of the economic headlines until late on Sunday due to the political instability in Europe dominating headlines. This coincided with the Pounds strengthening which could be an indicator of how the Pound will fare in future in my opinion.

Perhaps moving forward no news will appear to be good news regarding the Pound in the current climate.

The reason for Sterling’s drop yesterday can mostly be put down to investor fears that Theresa May and her political team are already preparing for Scotland to call for an independence referendum in March, once Article 50 has been triggered. Those hoping the Pound will return to pre-Brexit levels should follow this story closely, as during the last Scottish Referendum on independence the Pound came under considerable pressure.

Theresa May will announce the end of free movement for new EU migrants on the same day she formally triggers the Brexit.

This would mean that EU citizens that travel to Britain after Article 50 has been triggered will no longer have the automatic right to permanently stay in the UK. The new scheme is expected to include changes on visas and restricted access to benefits. I expect the topic of the rights of EU citizens in the UK and the rights of Brits within the EU to be a major topic of negotiations in the upcoming months, with the potential to create swings for GBP/EUR exchange rates.

Is the Pound undervalued?

Much of the major banks price forecasts for the Pound this year have led to a cautious approach from Sterling sellers. I think that the increasing interest in Forward Contracts from clients is understandable, given the fact that the formal beginning of the Brexit is planned to start next month.
Earlier in February Deutsche Bank announced that the Pound could fall as low as $1.05 against the US Dollar once the ‘complicated’ nature of the Brexit becomes clear.

In stark contrast with Deutsche Bank, analysts at Morgan Stanley over the weekend declared that the Pound is the ‘most undervalued major currency in the world and will rebound to its pre-Brexit levels’. Their analysts believe both the invocation of Article 50 and the risk of the UK leaving the single market without a trade deal has already been priced in by markets.

The British Chambers of Commerce (BCC) is holding its annual conference today and earlier this morning the BCC suggested that Brexit should be delayed if no trade deal is struck with the EU by the end of the two-year negotiating process. It was in favour of the UK remaining in the EU during the vote, and it would like businesses to continue to be allowed to recruit skilled and low-skilled EU workers after the UK has left the EU.

If you would like to discuss the contrasting opinions of these institutions or how the Pound has performed so far in 2017, feel free to get in touch me at jxw@currencies.co.uk and I’ll be happy to offer my input. Alternatively, you can call our trading floor number on 01494 725 353.


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