Will Pound Slump with Brexit Trigger Date Set?

The fundamentals were thin on the ground yesterday but markets found some direction in the confirmation that the UK would trigger Article 50 to start the Brexit process next week. Off the back of this we have already seen another bout of political grandstanding from Brussels with the EU taking a hard line approach over exit negotiations, but it’s going to be important to try and filter out the noise from the reality here. We also have a slew of FOMC members speaking during the day ahead so any clues here over the timing of the next Fed rate hike will have clear implications for both the greenback and treasuries.

The Traders’ View

Our prop desk is showing some short interest over the US dollar, with EUR/USD positions proving profitable; GBP/USD shorts aren’t however looking quite as clever, although UK data later in the session could provide support here.

Fundamentals – With Brexit trigger date set, pound slumps


Yesterday provided us with a good illustration that the market isn’t always as efficient as we might like to think it can be. It was announced shortly after 11.30am GMT that Article 50 – the process for the UK leaving the EU – would be triggered on Wednesday 29th March, but it took the best part of half an hour for EUR/GBP to complete its first leg higher. Although the announcement was far from unexpected, the market has still felt the need to post some reaction with the fact that talks may have to wait a further three months before getting underway seemingly weighing on sentiment. We have February’s UK inflation data due for release at 9.30am so a print above 2% could drive the conversation back to policy tightening at the BoE and help reverse some of these losses, but for now Sterling is very much on the back foot.

Despite the very clear position over divergent interest rates between the US and Canada, USD/CAD has spent the last six months trading in a relatively well defined range between 1.30 and 1.35. Upside for the pair appears to be limited off the back of concerns that the greenback is too strong and Trump’s policies may include attempting to devalue the currency at some point. The Loonie also holds some proxy appeal, so look for today’s Canadian retail sales reading at 12.30pm GMT to provide some fresh direction here. After disappointing December prints, anything much above 1% could be sufficient to lend further support to CAD crosses.

We have a series of Fed spokespeople commenting during the day ahead and there’s a mounting expectation that the hawkish rhetoric will continue to abate. The dollar index is working its way back down to 100 and treasury yields are also slipping. Expect this pattern to continue so long as the mantra of two further rate hikes in 2017 is maintained.

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

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