Article 50, the clause of the Lisbon Treaty explaining the process for exiting the European Union, has just been activated. Theresa May has signed the letter and it’s been delivered to Donald Tusk, European Council President.
What follows is uncertain, but the official timeline is for two years of exit negotiations, during which time the UK will need to settle outstanding bills, agree on the rights of its citizens living abroad and EU citizens already residing in the UK, and how it interacts with the project regarding trade, investment and immigration.
Uncertainty on the currency markets regarding Brexit has kept the Pound trading with volatility since the EU memberhsip referendum was first announced. Markets have had plenty of time to prepare for the activation of Article 50, but was it enough?
Considering the Pound is currently holding solid gains against the majority of its peers, it seems that investors have already done what is known as pricing-in the impact not only of the start of negotiations, but also the risk of talks resulting in a ‘Hard Brexit’.
Pricing-in is where traders predict the way a currency will react to certain events or data and then trade it in anticipation of it reaching that value. As investors have known for months that the Pound is likely to fall dramatically once Article 50 is triggered, they therefore hold a dovish outlook on the currency.
Knowing it will be weaker has influenced where they choose to invest and how; those looking to hold an investment for several months won’t want to buy the Pound if it has a risk of significant depreciation in just a few weeks’ time. Traders expecting the Pound to weaken have either bought other currencies, or sold the Sterling they held; in both cases leaving little demand for GBP, which lowers its price.
The positive reaction from the Pound today comes from the fact that markets have been trading GBP as though Article 50 has already been activated for some time.
With the event now over, investors are starting to consider what comes after. The realisation that Article 50 may be little more than a formality, with nothing much changing in the status quo for some time afterwards that could alter the Pound’s value, is prompting investors to tentatively return to Sterling.
This is helping keep GBP EUR and GBP USD exchange rates in positive territory, despite an initial slump this morning. Gains have edged back from their highs, however – there are still risks that EU officials could soon comment on their negotiating stance and signs they intend to play hardball would bode ill for the UK.
Investors are largely buying, or at least holding, Sterling for the time being, but it is hard to predict how political events will unfold, so there is still a strong chance that something will happen that will send traders running from the Pound once more.
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