Sterling sinks as Brexit negotiations loom

15 March, 2017

The Pound collapsed 0.6% after the UK Prime Minister Theresa May received the long-awaited approval to initiate the Brexit process, triggering Article 50 of the Lisbon Treaty. This became possible after the House of Lords approved the draft of the exit, overturning the two amendments of the House of Commons.  Now there is a long, bumpy road ahead for the UK, full of concessions and trade-offs with European politicians in order to secure the best exit terms while trying to ease tensions and maintain its ties with the European Union. May’s aim is to gain greater control over the domestic and foreign policies of the country. Losing the EU trade market, which accounts for 44% of the UK’s exports, is unlikely to be offset by gaining other business partners; comprising one of the most crucial points of the discussions.

Europe is likely to require warranting rights for European expats living and working in the UK but does not possess citizenship. To avoid the migration crisis, the government of May will have to give a choice to European citizens whether they want to stay or leave and streamline the process of acquiring legal status for them. There is a large number of expats who wish to obtain a UK passport, struggling with the complicated procedure of receiving the required documents that bring this issue to the forefront of discussions.

The European currency remains solid above the level of 1.06, despite the fact that investors helped the dollar gain some traction, after the FED-driven selloff seen on Monday. EUR/USD support looks fragile and won’t probably sustain a dollar rate-hike rally, as gains above this level will likely be limited after Draghi confirmed a pickup in the Eurozone economy and the sharp weakening of the dollar ahead of the FOMC interest rate decision. FED’s favourable decision to tighten monetary policy will allow investors to renew their dollar bids and get space for manoeuvre, after Monday’s pullback, thus pushing the main currencies into a bearish territory. The dollar also excelled in competing with the defensive currencies – the Japanese yen and the Swiss franc –  rising 0.2% against each of its counterparts. “Commodity” dollars, namely the Canadian and Australian currencies, are also traded in negative territory against the US dollar, affected by the weakness of the oil market.

The probability of a rate hike in March rose to 93% according to CME data, which in fact makes the event itself irrelevant for news traders. Investors’ attention will be focused on FED’s economic forecasts, or rather on the degree of buoyancy, which will help them to estimate the timeframe of future hikes at the following meetings while giving fresh impetus on the dollar. A confirmation of the US growth forecasts with two more rate hikes this year will probably allow the US currency to continue to strengthen, while a dovish tone by Yellen can cause disappointment and even send the dollar into the selloff.

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