Pound Fluctuates as U.K.'s May Officially Starts Brexit Process

  • Sterling earlier reached one-week low versus the dollar
  • Pound can ‘brush off’ Article 50 weakness: City Index’s Brooks

Here's Why Everyone Is Short Sterling

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The pound swung between losses and gains as the U.K. started the process by which it will leave the European Union.

Sterling fell earlier Wednesday to a one-week low against the dollar before recovering as British Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty. This will officially start time on two years of Brexit negotiations. “After nine months the U.K. has delivered,” EU President Donald Tusk said in a Twitter post after receiving a signed letter from May.

The pound fell Tuesday after Scottish lawmakers voted to back plans to pursue a second referendum on splitting from the U.K. There was direct pound selling on the back of the Scottish vote, said a London-based trader, who asked not be identified as the person isn’t authorized to speak publicly.

The pound had “dropped below 1.24 as Article 50 fears and the prospect of a second Scottish Referendum start to bite and the dollar roars back to life,” Kathleen Brooks, EMEA Research Director at City Index, wrote in a client note. “This could be a case of sell the rumor, buy the fact, and we stick to our view that sterling can brush off Article 50-inspired weakness and that sterling is essentially range bound as we formally kick off the process to leave the EU.”

  • GBP/USD falls 0.2% to 1.2423, after touching 1.2377, the lowest since March 21
    • The pair halves up-move since mid-March, but too early to call for top; closing break below 1.2303 is a red flag, writes Sejul Gokal, Bloomberg technical analyst
    • Support at 1.2362, 50% retreat of March 14-27 rise
  • EUR/GBP falls 0.3% to 0.8663
  • Ten-year gilts rose, with yield falling three basis points to 1.17%
  • “We do not expect much in the way of a sharp sustained pound sell-off, or any notable pick-up in volatility” on the invoking of Article 50, said Derek Halpenny, the London-based head of European markets research at MUFG
    • “Our bias would still be toward a stronger pound over the coming weeks as once today’s event has passed there will not be much for speculators to trade off for perhaps up to six weeks”
  • Buy sterling and U.K. domestic cyclicals, which seem to be priced for excessive pessimism, strategists at Morgan Stanley including Andrew Sheets said in a client note

— With assistance by Vassilis Karamanis

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