UK Sterling Slides as Theresa May hammers in Brexit

The U.S. dollar strengthened against the British pound, which fell to its lowest level since January, following the  U.K.’s talks of Brexit. Against the dollar, the pound dropped to $1.2151 from $1.2219 late Monday in New York, a move of about 0.5%. However, while the pound was off its low of the session, the USD at traded near levels it hadn’t seen since Jan. 17.As the day moved, the pound is down 1.8% for the month of March, and 1.6% thus far in 2017.

The U.K. parliament approved legislation that would allow Prime Minister Theresa May to start the formal process of=exiting from the European Union, in wake of populist support for the decision. However, May’s triumph was sidelined on account of Scotland’s First Minister Nicola Sturgeon, who plans to seek secondary approval for a second-second referendum on Scottish independence before Brexit. This, in turn, compounded market concerns and exacerbated volatility over foreign exchange currency and British-backed securities within the fixed income space.

Koji Fukaya, chief executive of FPG Securities, said that if the Bank of England is seen to be dovish, the pound could weaken against the euro. However, if the U.K.’s central bank remains neutral, it could drive further euro strength against the pound in the short term, making for a very volatile currency pair. Furthermore, investors are also keen on the outcome of the Dutch election which elected a liberal politician, thus eradicating all fears of continued further disenfranchisement within the European union.

In addition, the Sterling was recently trading around $1.214 against the dollar and around €1.139 against the euro, as traders citing mounting uncertainty with the current political climate as warrants for a mass sell-off by the market, as institutional clients and fund manager seek to curtail their risk and lower their exposure to European markets, primarily those within the eurozone. According to John Wraith, the head of UK rates strategy and economic at UBS, “The triggering of Article 50 has been well telegraphed and is unlikely to cause a major stir for sterling in itself, in our view, as it does increase headline risk, particularly as the opening negotiating positions of the two sides are far apart”.

As such, the forecast for the pound looking forward are mixed, given the immense volatile followed by accompanying swings by geopolitical events that serve to complicate the market and add unnecessary risk to portfolios. Alexandra Russell-Oliver, a market analyst at Caxton noted that “There are still significant questions about what Brexit will look like and what the implications will be, and the pound will stay vulnerable until we get greater clarity.” As a result, various asset managers have begun attracting investment and pulling back from speculative offers. Michael Stanes, an investment director at Heartwood Investment Management, said that he was limiting his exposure to any UK assets at the moment, including equities, many bonds, and the pound.

As it standing, the currency is down about 18% against the dollar since the EU referendum and while there appears to be a consensus that the prospect of a hard Brexit is being reflected in the currency, many still believe that there can be a continuation of the downward trend.

As a result, many question whether the British government will be able to quell the systemic bleeding and if they will be able to rekindle their depreciating currency in wake of the Brexit decision. However, I believe that renewed investor confidence bolstered by long term market stability shall enable Britain to stabilize their rather volatile start to independence, and ultimately balance their level of risk to then encourage external investments on account of sovereign wealth funds and individual high net worth investors.


Update:

Sterling surged more than 1% on Tuesday to its highest level in over three weeks, as some investors and traders speculate a rapidly accelerating inflation rate that would push the Bank of England to raise interest rates sooner than expected. According to data,  British inflation jumped in February above BoE’s 2% target for the first time since the end of 2013, with consumer prices rising by a stronger-than-expected 2.3%.

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