The pound and Brexit: expert thoughts

Pivotal week

“Brace yourselves,” said Tara Cunningham in The Daily Telegraph. This week has been “the most important week for global markets so far this year” – a “jam-packed few days” of policy and economic announcements that “could have a significant impact on forex, equity and bond markets”. As well as the US Fed’s decision on interest rates, election season has kicked off in Europe, while in Britain, the Government is readying to trigger Article 50. The call from Scottish First Minister Nicola Sturgeon for another independence referendum to be held in the middle of Brexit negotiations added to the sense of flux. Conditions are ripe for a febrile period ahead – especially for the pound.

Sterling falls

Sterling was initially “resilient” to both PM Theresa May’s Brexit Bill and the prospect of a second Scottish referendum, noted Daniel Grote on Citywire. But the pound then fell sharply to “an eight-week low” against the dollar. One reason for that was “the dollar’s strength” ahead of the Fed’s expected interest-rate rise. But, as Kathleen Brooks of City Index observes, “the reality of the UK’S divorce from Europe, and two years of horse-trading to agree deals, is beginning to spook the foreign exchange market”.

Article 50 and all that stuff

“Investors have struggled to make sense of the politics and economics of Brexit ever since the referendum,” said Roger Blitz in the FT. A “large devaluation” early on “prompted gloomy predictions for the pound”. But the economy’s resilience, and May’s “more coherent” remarks on Brexit early this year, have kept sterling above $1.20 since the threshold was tested in January. Although the triggering of Article 50 “has long been regarded as likely to be a significant market-moving event, analysts now expect the moment itself to have only a modest impact on sterling”. The question is how the pound will fare afterwards. Given the difficulty of predicting the progress of “two years of Brexit negotiations”, strategists are “reluctant to forecast anything significantly at variance with the pound’s current value during at least the remainder of 2017”. Nonetheless, expect sterling to stay vulnerable until we get greater clarity.