Sterling has been volatile since the UK voted for Brexit last June, but with Article 50 imminent, it has taken a further tumble. Meanwhile, the Euro is holding firm following Mario Draghi’s upbeat comments on the strength of the Eurozone economy and rising inflation.
Volatility Negligible
The majority of forex analysts don’t believe triggering Article 50 will have a major effect on the value of Sterling.
Strategists from Morgan Stanley told the Financial Times, “We don’t think that triggering Article 50 will be a big event for the currency.”
This upbeat news should reassure investors, but it’s likely that Article 50 will cause a few ripples on the forex markets, particularly when negotiations begin.
With a general election taking place in the Netherlands on Wednesday, speculation is rife as to whether Theresa May will trigger Article 50 tomorrow, but International Trade secretary, Liam Fox, has said that Mrs May will issue Article 50 within the next two weeks.
The government had hoped that the road ahead for triggering Article 50 would have been cleared by now, but a series of delays following two defeats in the House of Lords have scuppered Theresa May’s timetable. Assuming the article bill doesn’t suffer a third defeat, all the bill needs now is a final royal assent and it will become law.
Sterling Undervalued
Right now, analysts say sterling is undervalued since the UK economy is growing at a rate of 2%, but it is likely to weaken further against the Euro in the coming months, particularly if the Federal Reserve raises US interest rates. Sterling has fallen against the Euro in the last two weeks, but there is scope for further lows. However, the long-term direction of Sterling will hinge on the outcome of the Bank of England’s monthly meeting in March.
Eurozone Strong
A tight fiscal policy announced in the Autumn Statement 2016 has continued to be a drag on GDP growth, which has exerted significant pressure on Sterling. Meanwhile, on the inflation front, a 1.8% rise in January and 2% rise in February in the Eurozone has strengthened the Euro, which has just risen to a one-month high following reports that the European Central Bank is considering raising interest rates. This is turn has fuelled a downturn in GBP/EUR.
What happens next is largely dependent on how the EU reacts to the triggering Article 50 and the results of the French presidential election.
