Where is sterling heading?

  • How have investors reacted to Brexit?
  • Investors have struggled to make sense of the politics and economics of Brexit ever since the referendum.
  •  A large devaluation in the early post-referendum days prompted gloomy predictions for the pound.
  • At times, the government’s Brexit policy, particularly its confusing communication strategy, left investors flummoxed and so more inclined to be bearish on sterling.
  • But the economy’s resilience and Theresa May’s more coherent Lancaster House speech on Brexit in mid-January have kept sterling above $1.20 since that threshold was tested in January.
  • Meanwhile, the government’s legal difficulties, which at one stage cast doubt on its Brexit timetable, have been largely forgotten as it has steered its Article 50 bill through parliament.
  • What will happen to sterling when Article 50 is triggered?
  •  It has long been regarded as likely to be a significant market-moving event but forex analysts now expect the moment itself to have only a modest impact on sterling.
  • Investors are no longer in denial about Brexit, and have been pricing in the reality of the coming divorce.
  • Still, Article 50’s trigger will not go unnoticed by investors. Even though it is a sure-fire event, further weakness may ensue, possibly involving a test of the January low.
  • More significant may be the EU’s response in the days after the announcement, and what it says about the negotiations process.
  • How is sterling shaping up as the negotiations begin?
  • Sterling is considered cheap, given the underlying health of the UK economy, now forecast to grow 2 per cent this year.
  • While that is a buying opportunity to some, a series of factors are also assuming greater importance to investors than the Article 50 trigger. These include the increasing burden of sterling’s decline on corporate Britain, the risk of Brexit on inward investment, the relationship between Mrs May and other EU leaders in the run-up to official negotiations and the French presidential election. There is also the prospect of US interest rate rises to consider.
  • So sterling is heading for what value?
  • The problem for investors is how to judge the progress of what will be two years of Brexit negotiations. Which is why several strategists are reluctant to forecast anything significantly at variance with the pound’s current value during at least the remainder of 2017.
  • More likely is that sterling’s direction will be influenced by developments in other countries. For example, there is scope for the pound to weaken against the euro in the coming months, if the eurozone economy continues to strengthen, Marine Le Pen loses the French presidential election and the European Central Bank becomes less dovish.

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