Wednesday, 29 March 2017

Article 50 impact on the pound

This afternoon has seen UK Prime Minister Theresa May trigger Article 50 and begin the official divorce proceedings with the European Union.

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Since Monday afternoon the pound has been slipping against the U.S. dollar, with the GBP/USD cross falling from an eight week high of $1.2614 to $1.2375 in the early hours of this morning.
Some thought the move was a sign of things to come and that the value of the pound would plummet the moment Article 50 was invoked.
However, I have been saying for weeks that I didn’t think the pound would suffer on the back of Article 50 and that today could even be a bit of a non-event……and that is exactly what has happened.
As Theresa May delivered her speech at 1230 BST, the pound actually start to rise against the dollar, with the currency pair rising almost a cent to hit $1.2475.

GBP/USD graph


Why has the pound held its ground?

The main reason is because today has not come as a shock. We have known for months that the UK government planned to trigger Article 50 by the end of March, and it seems it was already priced into the value of the pound.
Yesterday’s decline for the GBP/USD cross was not only down to markets positioning themselves ahead of today’s events and Sterling weakness. After a dreadful few days for the dollar, it actually managed to claw back some lost ground yesterday afternoon, after the Federal Reserve once again promised additional interest rate hikes over the course of this year.

What next?

Although the pound has managed to hold its head above water today, it is almost certainly going to remain under pressure for the foreseeable future. We now have the prospect of two years of negotiations to deal with, and during that time we are going to see some big swings for the GBP/USD cross.
The dollar could also come under pressure this year as markets try to adjust to President Trump and his policies. We have already seen the dollar suffer this week after Trump failed to push through his reformed healthcare bill and with concerns mounting over the rest of his agenda, we could easily see the dollar give up the gains it has made since Trump won the election.

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