Pound Lower As UK and EU Divorce Begins

UK PM Will Deliver Letter Triggering Brexit

The Prime Minister of the United Kingdom, Theresa May, will invoke article 50 of the Lisbon treaty on Wednesday, March 29 at 7:00 am EDT (11:00 GMT) by telling the British parliament that she has submitted the signed letter to the European Union. This symbolic exchange will trigger a two-year process that will result in the UK withdrawal from the EU. The PM will face questions from the Commons at that time with a statement expected at 7:30 am EDT (11:30 am GMT). Within 48 hours the EU will circulate a draft of negotiating guidelines to be discussed in late April.

The Brexit referendum on June 23, 2016 kicked off a tidal wave of political instability as British citizens voted to break a long-standing economic and social pact. Opinion polls badly missed the mark, leaving markets in high state of volatility as investors reacted to the shocking result. The pound has depreciated more than 15 percent since the vote as the Bank of England and other institutions have warned of the risks of ending the relationship without a fall back option.

The market has already priced in the first wave of Brexit after the referendum but the length of the process and the different stances (hard vs. soft exit) and the particular timing (French and German elections this year) complicates the valuation of the true impact to the UK economy of the decision to leave the Union. Investors need to follow the developments out the London and the reaction in Europe as this two-year divorce gets under way.

The GBP/USD lost 0.851 percent in the last 24 hours. The pound is trading at 1.2463 ahead of Theresa May invoking article 50 of the Lisbon treaty and effectively triggering the two year Brexit process. The currency is lower as investor anxiety rises despite tomorrow’s proceeding being mostly bureaucratic with little room for surprises.

Former UK PM David Cameron resigned on the aftermath of the Brexit referendum leaving it up to Theresa May to steer the UK into uncertain waters. The European Union has made it clear that they will be tough negotiators with Germany the most vocal with Finance Minister Schauble saying : “We have no interest in punishing the UK, but we also have no interest in putting European integration in danger over the UK,”

The main contributor to volatility in the pound trade will be the negotiations as the Brexit Leave camp made bold promises that are almost impossible to get the EU to agree to. The upcoming French and German elections complicate matters for the UK Brexit negotiating team as the results could reshape the EU into one pushing a tougher endgame for the UK.

The UK100 has risen 0.667 percent in the last 24 hours. The FTSE closed at 7,343.42 recovering from a 0.6 percent fall the previous trading session. The fall of the currency has boosted the British stock market as it can result in higher sales for UK companies. The stock market had recorded losses on Monday due to the lack of confidence in the US President Donald Trump affecting global stock markets. Equities were sold given the problems the US administration faced when pushing through the healthcare bill to repeal Obamacare. The UK financial sector could end up being one of the biggest losers if London loses relevance as global banks abandon the city in an effort to keep doing business in Europe.

A worrying trend for the UK appears to be the softening of May’s tone on seeking a hard Brexit taking in contrast to Germany’s tougher stance. The fact that the 27 members have to agree on a deal will further complicate things specially as member elections and fear of more anti-union movements within the EU could end up with a worse deal for the UK with a limited set of options.

Market events to watch this week:

Wednesday, March 22
7:00 am UK Government Triggers Article 50
10:30 am USD Crude Oil Inventories
4:00 pm NZD Official Cash Rate
4:00 pm NZD RBNZ Rate Statement
Thursday, March 23
5:30am GBP Retail Sales m/m
8:00am USD Fed Chair Yellen Speaks
8:30am USD Unemployment Claims
Friday, March 24
8:30am CAD CPI m/m
8:30am USD Core Durable Goods Orders m/m

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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