Article 50 may mean near-term weakness for sterling

gbp to usd

Mar 14, 2017 (LBO) – The UK government may soon trigger Article 50 formalizng Brexit which means sterling could see some near-term weakness, analysts said.

The European Union (notification of withdrawal) bill will become law when it gets the royal assent — government sources now indicate British Prime Minister Theresa May will wait until the end of the month before triggering it.

Still, sterling is trading half a percent higher against the dollar after Scottish First Minister Nicola Sturgeon called for a fresh referendum.

Sturgeon wants a vote to be held between the autumn of 2018 and the spring of the following year that would coincide with the expected conclusion of the UK’s Brexit negotiations.

“We would assume that both the Treasury and the BoE are now too optimistic upon growth we do not necessarily expect aggressive fresh sterling extremes, this comes as the market has already discounted most of the bad macro-economic news,” Jeremy Stretch, head of G10 fx strategy at CIBC, told CNBC.

“If we assume that Europe avoids a near-term political meltdown that will boost the sterling against the euro, but we do not assume forecasts in excess of 0.90, even if the ECB look to row back on stimulative monetary policy into the third or fourth quarter.”

Sterling saw a sharp fall on the back of the Brexit vote, plunging from highs of $1.50 to a 31-year low of $1.32, the pound continues to remain under pressure at current levels of $1.22. The currency is down more than 17 percent since the referendum day.

Kallum Pickering, senior UK economist at Berenberg, says if May takes a non-confrontational approach and signals a desire to maintain a high degree of openness to the UK for EU workers, markets could react positively in the coming months.

The dollar was steady on Monday as investors look to this week’s Federal Reserve’s policy meeting in which it is expected to raise rates by a quarter percentage point.

An interest rate rise would boost the dollar as it improves appeal of U.S. assets.