How Article 50 will Affect Markets

The announcement of the UK’s intention to exit the single-currency Eurozone (and the EU at large), caused the pound to fluctuate but the most significant movement was seen the day following the official referendum vote, that saw 51.9% of voters in favor of the leaving the EU. The GBD/USD plummeted from 1.49036 on June 23 (the day of the vote) to 1.36834 on June 24th and has not managed to rally above 1.35 (which could be considered a previous baseline or lowest price for the currency pair).
GBP/USD Continuing to Drop?

On the 29th of March we saw the UK move closer towards separating the European Union with the enacting of Article 50, which puts the country on a two year path towards independence – both financial and policy wise. On the day of Theresa May current UK Prime Minister launched Article 50 the GBP/USD closed at a historical low of 1.2133 (29th of March) and saw only a slight and conservative rise to 1.24763 when the pair closed the next day (30th of March).

GBP/EUR Still Connected?

Of course the image of the GBP/EUR wasn’t as stark considering that confidence in the Union’s single currency inevitably wavered also, due to the UK’s economic girth and perceived contribution to the EU’s economy. On June 21st the GBP/EUR held at 1.3030, rallied to 1.3065 on the day of the referendum and drop significantly to 1.2305 the day after (June 24th). Since then much like the GBP/USD the GBP/EUR pair has not managed to move above 1.25 mark.

The question though is what will happen until the UK’s complete exit?
GDP, Service Sector Growth and Business Investment

A more worrying trend is the service industry’s growth falling to 53.3 from its January level of 54.5. The reason this is worrisome, is largely due to the fact that the service industry accounts for a large part of the UK’s GDP (up to three quarters according to sources). In seeming contradiction though, the Office for National Statistics reported an increase of GDP from 0.6% to 0.7% in last three months of 2016.
The truth though is that the GPD growth is expected to not only halt but drop lower in the first part of 2017. Inflation - which is the highest it’s been in the past two years is expected to increase further which in turn will further weaken the GBP.
To add insult to monetary injury, business investment fell 1% in the last part of 2016, due again to wavering confidence in the UK’s ability to conduct business as normal during the transitional period post-Brexit.
There is yet more troubling news coming out of the aftermath of Article 50 – the potential hit to Consumer Purchasing Power as a result of increased tariffs imposed on EU imported goods and services, which is another factor which is closely tied to economy’s health and the value of its currency.

Ireland and Scotland

Another after-shock felt by the triggering of Article 50 is the possibility of Scotland and Northern Ireland remaining in the EU by declaring independence. Scotland has become an especially hot button item as there has been a forth-right denial by the three primary political parties in the UK’s Parliament, for Scotland to use the Sterling in the case they remain in the EU or alternatively claim independence and remain.
If Scotland leaves - and a poll performed on the 28th strongly indicated towards that being a high possibility - both UK stocks and the Sterling could be negatively affected.
Uncertainty Equals Low Prices

With the Scottish independence referendum approaching and the ‘no’ vote only having a six point lead over ‘yes’ to independence and the EU playing hard-ball with the UK regarding trade and financial sector agreements – the pound’s future seems volatile – and the markets are responding. This uncertainty will undoubtedly continue, at least for next two years, further pushing investors and traders away from UK tied stocks, bonds and currencies.
As negotiations are still going on between the EU and the UK and will continue to do so for the next two years, the outcome might be too early to call, but you can use one of STO’s accounts that includes access to the MT4 platform to stay informed about the movement of the pound, euro and dollar, from desktop or mobile.


This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

STO Review