What happens to the pound once Article 50 is finally triggered - Another view

Author: Mike Paterson | Category: Education

What happens to the pound after Article 50 is triggered on 29 March?

Here at ForexLive we pride ourselves on bringing you a balanced and varied view on potential moves be they data , CB or major forthcoming events so here's my humble take/guess on what will happen after UK PM Theresa May finally pulls the trigger to exit the EU tomorrow.

Not a lot. 

Sorry to disappoint you and all the GBP bulls out there, including a few banks, but this is just the official start to the Brexit process and has in any case been well flagged/over-hyped for many months.

Some may ask why there have been more shorts added recently to record levels but it's not just because the trigger is being pulled. There may some just in it for the knee-jerk short haul but equally there'll be a few longs hoping for a ride higher too. In my day we would have had seen little reaction on the news because anyone with any experience would already have factored it in, treated the occasion as a relative non-event and in any case be looking at the longer game. It would have been largely a non-event in market terms even if on every front page of every newspaper and media report.

And that's the difference now you see, and as I highlighted many times here previously. It's 2017 not 1987 or 1997 and that means, sadly in my view in term of market making and rationale, that with an estimated two-thirds of desks ( in London at least) now being of algo/robotic nature we bizarrely can't work on rationale or common sense, just headline reaction for much of the time.

Maybe I do the robots, and their programmers, an injustice and I would hate to sound Jurassic but 38 years in the game, 20 at the very top end, makes me yearn for the old days when markets and its traders could/would be pro-active much more than now. Anyhow, more on that another time.

So will we see a dip on the headlines tomorrow? Probably. A massive short-covering squeeze afterwards? Highly unlikely imho.

The basis for the massive decline in the pound since last June's referendum has been the uncertainty that accompanies Britain's path forward as we attempt to disentangle ourselves from the EU and renegotiate terms not only with them but our trading partners and allies worldwide.

Tomorrow's official starting gun will not ease any of those concerns. Indeed one could argue that almost 1 year on the (changed) UK government seems even less prepared or formed in its view than it ever has so what's going to change so quickly over the next few days/months?

Negotiations are expected to last around 2 years but could go on a lot longer. Equally it could be a lot less but that seems unlikely with so much bargaining to be done. The EU has its own problems to deal with not least of which two key elections in France and Germany this year but even without those there will be a lot face-saving/posturing to be done across the table and in the media.

                  Brexit - The really big debate gets underway tomorrow

The latest talk from the UK is that May & Co (how united are they anyway?) are reviewing their  stated position of "no deal is better than a bad deal" and that could lead to more convoluted deals. Don't dismiss the UK throwing some toys out the pram too though in any case.

In my decision to vote Leave that I posted on here at ForexLive I said I believed that the UK will be a better place eventually and that means some support for the pound again down the line. I stand by that view but we're a long way from getting any hard evidence for a while yet and I remain ( sic) a GBP bear and rally seller. Yes, the market may be short, oversold even, but it's for a reason and that reason hasn't gone away. Yes, oversold /overbought markets can produce extreme corrections but I don't see one yet.

Also to keep in mind this week are month-end EURGBP demand and year-end JPY demand both of which can help to cap/limit any GBP gains that might emanate on a relief-rally basis tomorrow/Thurs/Friday. Trump-related USD supply may help underpin GBPUSD though but that only serves to highlight the other issues also to consider right now, not just a ceremonial launch of Brexit.

Predictions are all guess work in any case. As always I will add this rider to any thoughts/forecasts understandably, ours is not to reason why, ours is just to sell and buy (with a nod to Lord Tennyson for the material).

We can not predict with any great accuracy so we have to play the outcome as it pans out. We may well see moves up/down of 100-200 pips but I can't see any justification for larger moves either way at this time. Overall though bears like me will be happy to sell into rallies until otherwise convinced. Patience may be needed for best value entry but that's not so bad.

The UK will still be very much learning to fly for a while yet.

So while we're waiting to see what happens tomorrow why not have a guess of your own in Ryan's prize-giving competition. Roll up , Roll up !