Article 50 in focus as phoney war comes to an end
At some point tomorrow prime minister Theresa May is expected to set in motion the beginning of the two-year process for leaving the European Union, just over nine months after last summer's historic Brexit vote.
In the wake of this there is a widespread expectation that this act could act as the catalyst for a further leg lower in current bearish sentiment towards the pound, particularly since short positions against sterling remain at record levels.
While it may seem easy to buy into the reasoning behind this particular thought process, they depend to a large degree on a host of lazy assumptions, including the belief that “remainers” will finally see their doom-laden narrative start to bear fruit.
I prefer to look at the facts: the triggering of Article 50 is not a surprise; we’ve known that it would be coming this month. Markets have had ample time to prepare. Recent economic data continues to remain fairly buoyant, even though there are some weak points but that is entirely normal in a time of rising prices and squeezes on incomes.
Furthermore, the predictions of a sterling fall to $1.10 against the US dollar from some a number of credible sources seem more designed to generate headlines than be grounded in any type of economic reality. Most of the economic downside is largely already priced in, which would suggest that as long as we stay above the recent lows then the risk remains more to the upside than the downside.
The prevailing narrative also ignores the fact that the pound has been in a steady decline since the end of 2015, down for six quarters in a row, which is its worst losing sequence since the 1980s.
This alone would suggest that the scope for further downside remains limited to an outside risk scenario, or a very low probability. That doesn’t mean it won’t happen, but on a risk/reward scale ratio there is more risk attached to being short with the crowd, given we are already at multi-year lows which means on that basis alone the pound is cheap.
If anything the act of triggering Article 50 could be one of those “sell the rumour, buy the fact” type of trades that has the potential to drive the pound up towards its recent highs and towards the $1.30 area, where it was prior to the recent Bank of England rate cut in August.
Too much time has been spent over the past few months focusing on trying to reverse the outcome of last summer's vote. As such this week's action by Theresa May has the potential to draw a line under the events of the last nine months as well as setting the stage for the next chapter in the UK’s future relationship with the EU. That is undoubtedly a good thing.
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