All eyes are on sterling as Prime Minister Theresa May prepares to trigger Article 50, formally starting the two-year countdown to Britain’s divorce from the EU.
The pound is down, having endured a bumpy ride in recent weeks, but where will it go from here?
What has happened to the pound since the Brexit vote?
Confirmation that the UK voted to leave the EU sent sterling down to its lowest level since 1985.
On the night of the referendum the value of the UK’s currency plunged by 11 per cent against the US dollar – its biggest intra-day fall in modern history.
And the pound has been on the slide again since the beginning of October in the wake of Theresa May’s pledge to commence the UK’s official EU divorce proceedings by March.
How is sterling shaping up as Theresa May prepares to trigger Article 50?
On Wednesday morning, the pound slipped against a slew of currencies. It was down round 0.5 per cent at $1.2393 against the dollar having on Tuesday briefly peaked above $1.26, a seven-week high.
It was also down against the euro, the Swiss franc and the Australian dollar.
Are investors expecting another dramatic drop once the process begins?
There doesn’t seem to be any real consensus in markets. The most common prediction is that sterling volatility is far from over but that the actual triggering of Article 50 will not be a shock event.
“There may be many Article 50-related news headlines in the coming weeks but we believe that a lot of the negativity around Brexit-related economic data weakness is already in the price,” strategists at Morgan Stanley wrote in a 2 March note.
A poll of more than 60 banks and research institutions conducted by Reuters that was released earlier this month also predicted that there will be no dramatic sterling moves once Article 50 is triggered, however those questioned also do not expect the currency to recover sustainably from its post-referendum lows.
Most economists predict the pound will trade at $1.23 against the dollar by the end of June, and drop to $1.21 in the subsequent three to six months.
Great, so there is no reason to worry then?
Perhaps it’s a bit too early to sit back and relax. Some economists are much more pessimistic.
Analysts at Danske Bank earlier this month said that they expect the pound to fall to $1.19 by the end of March.
And Deutsche Bank in a note last week said that the pound could fall as a low as $1.06 against the dollar by the end of 2017, or another 15 per cent- which would be a new 31-year low for the currency.
David Lamb, head of delaing at FEXCO Corporate Payments, on Wednesday said: “While there is some relief that the post-referendum limbo is over, the ultimate shape of Brexit is as unknowable as ever.”
“For now the pound and euro remain finely balanced, but sterling’s pre-Article 50 bullishness is likely to be short-lived.
“With Brexit uncertainty set to dominate sterling’s relationship with the Euro for months to come, Wednesday’s events merely mark the end of the beginning.”
What is likely to make the pound drop further or recover?
Declines in the value of the pound since the initial aftermath of the Brexit vote have mainly been sparked by concerns that the UK is heading towards a hard Brexit - in which access to the EU’s single market would be sacrificed in favour of tighter control over immigration.
Neil Wilson, senior market analyst at ETX Capital, said the trend is likely to continue when negotiations begin.
He said: “The old hard v soft Brexit debate is once again central to expectations for the pound. Sterling will rise on any indications of a softer Brexit and fall on any signs it’s going to be hard. If we head towards a cliff-edge then it could collapse.”
“We are likely to see a lot of to-ing and fro-ing between the various Brexit scenarios. Theresa May has set the UK on course for a hard Brexit – no deal is better than a bad deal – but we can expect this to shift in due course once the EU sets out its stall.
“It’s going to be a fine line for May to tread as she’s in hock to the hard Brexit camp in the Conservatives. She also doesn’t want to be seen to cave into demands from Scottish nationalists for a softer exit. All this points to sustained risk for sterling – if an acceptable deal isn’t done in time then the UK crashes out of the bloc on WTO terms and all the tariffs that entails.”
The issue for economists will also be how to assess and judge what two difficult years of Brexit negotiations will look like.
See how much you could save on international money transfers with HiFX: sign up and make a transfer
