Pound under pressure on Brexit trigger day

The pound slipped against the dollar and the euro on Wednesday after UK prime minister Theresa May signed the letter that starts the process for Britain to formally leave the EU.

In the early hours of Wednedsay, sterling fell 0.52% against the euro to €1.145 and 0.49% against the US dollar to $1.239, although it began to make a slight recovery later in the morning.

With the official process of leaving the EU just started, currency market players agree the pound will likely remain volatile against the world’s major currencies.

Commenting on May’s game-changer move after triggering the Article 50, FXTM research analyst Lukman Otunuga, noted sterling could be in store “for a rocky rollercoaster ride.”

“There is already an air of unease over potential complications in the negotiations with the EU’s demand for a £50bn Brexit bill acting as the first test which may create serious headwinds. Sentiment remains firmly bearish towards the pound moving forward and the potential resurgence of hard Brexit fears could ensure price weakness becomes a recurrent theme,” Otunuga said.

“The fact that sterling found itself on the back foot on Wednesday morning as Article 50 is about to be officially triggered continues to highlight how the Brexit risk has not been fully priced in with further downside shocks expected. While it is certain that today will go down in history as the day the UK decided to start an irreversible Brexit process that will terminate its 44-year-old membership with the EU, the outcome remains an uncertainty that may leave investors on edge.

“From a technical standpoint, the GBP/USD has found itself gripped by the Brexit woes with sellers exploiting the anxiety to install repeated rounds of selling. The technical breakdown below 1.2400 could encourage a further decline lower towards the next relevant level at 1.2300,” he added.

‘Undervalued’

Jon Jonsson, senior portfolio manager of global fixed income strategies at Neuberger Berman said sterling is undervalued at current levels, according to the asset manager’s long-term view.

“When the Brexit vote was announced last June, the pound tumbled and since then it has traded around 15% lower against the US dollar. How it performs over the next few months, however, depends on the tone and content of the negotiations that lie ahead. The UK economy has held up remarkably well, with an uptick in GDP in Q4, although more recent UK manufacturing data is less positive than it was,” Jonsson said.

Nancy Curtin, CIO at Close Brothers Asset Management, highlighted that the drop in sterling since the Brexit vote has provided a boost to the value of UK large-caps, given the largely international makeup of the FTSE 100.

The fall has also stimulated “a much awaited” rebalancing of the economy, as exporters and manufacturers benefit from the cheaper pound, Curtin said, although she also added that the negative effects of Brexit, such as the movement of major company headquarters or a plunge in consumer confidence, are yet to be seen and will depend on factors such as increasing inflation in the UK and political uncertainties in Europe.

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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