Sterling falls to eight-week low as traders take in Prime Minister Theresa May’s newly granted Article 50 powers
Sterling has wiped out all of yesterday’s gains against the dollar as traders take in the imminent triggering of Article 50.
Prime Minister Theresa May last night gained the consent of Parliament to start the process of leaving the EU.
The pound fell to its lowest point since mid-January to reach lows of $1.2110 against the US dollar, a fall of 0.75 per cent since late last night.
Losses against the euro were slightly more moderate, with the pound nearing similar eight-week lows below €1.14.
Read more: What will happen to the pound after Theresa May triggers Article 50?
Traders may now be pricing in a final positioning for “hard Brexit” as obstacles to May are removed. The House of Lords last night voted to accept the government's bill unamended, leaving the Queen's assent as the only hurdle remaining.
While sterling has generally gained as certainty around the shape of Brexit has increased, the prospect of two years of negotiations starting imminently may be unsettling traders.
Alexandra Russell-Oliver, currency markets analyst at Caxton, said: “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.”
Read more: Theresa May won't trigger Article 50 this week
The response of the EU to the notification the UK wants to withdraw will be a critical factor in the fortunes of the currency.
Article 50 of the Lisbon Treaty states the UK must notify the EU of its intention to leave the union, starting a period of two years at most before the divorce is officially concluded. While there is little detail of how the process will occur beyond that, it is likely there will be a response from assorted EU officials and leaders.
The incentive for EU leaders to adopt a tough rhetorical stance with regards to the UK is heightened by the prospect of multiple European elections this year, although this is likely to moderate as the economic consequences of a deal falling through become clearer later in the process.
Read more: Six risks of Brexit "no deal" after Article 50, as MPs warn May to plan now
Naeem Aslam, chief market analyst at ThinkMarkets, said: “What we said was that if Theresa May triggers Article 50 as per the plan, it will have negative impact on the currency. The reason is that this spells only one thing for investors: that she is heading towards hard Brexit negotiations with an attitude that she has nothing to lose.
“The biggest fear on the street is what will her EU partners will say and how they are going to treat this matter given that Brexit is about to become a reality.”
The pound could fall further in the medium term, according to Richard Falkenhall, senior FX strategist at SEB bank, despite it being undervalued against the dollar.
Read more: The road to Brexit: the impact on shares and property
He said: “Our main scenario in the coming months is that downward pressure on the pound will persist, mostly due to concerns related to Brexit talks and weaker than expected UK growth."
While the market could focus on other political risks, giving sterling temporary relief, the return to a fair value could be a long way off.
Falkenhall said: "The fact that the pound now appears cheap is insufficient to sustain a credible recovery by the currency at this stage."