UK Government triggers Article 50, Euro slumps on ECB report

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30 March 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling suffered from a choppy trading session on Wednesday on the day that the UK Government formally kick-started Brexit negotiations by triggering Article 50.

T
he UK currency fell rather sharply during Asian trading yesterday after the announcement that Theresa May had signed the letter formalising Britain’s intention to begin exit talks. The actual announcement itself came just after midday, although the reaction in Sterling to the news was fairly limited given it was heavily telegraphed.

The Pound will now trade heavily in the coming weeks and months on news regarding the state of negotiations. Consensus is split between those who believe the EU will deter other nations from leaving the bloc by taking a hard line stance on negotiations, and those who think the UK is too important to the EU to cut ties completely. With just about the worst case scenario currently priced in, we think long term gains for Sterling are entirely possible.

Elsewhere, the Euro fell sharply across the board after the release of a Reuters report which suggested that the European Central Bank was wary of altering its existing monetary policy message at its next meeting in April. An unnamed ECB source claimed that policymakers within the Governing Council were taken aback by the market reaction following the central bank’s previous meeting, the message of which the source deemed “overinterpreted”. The ECB’s slightly less dovish than expected statement earlier this month caused the market to sharply bring forward expectations for an interest rate hike in the Eurozone this year, sending the Euro sharply higher across the board.

Yesterday’s report comes in line with our expectations that the ECB is likely to wait for a sustained rebound in core inflation in the Eurozone before it considers raising interest rates or tapering its quantitative easing programme. We certainly expect no hint of a change in policy next month, which takes place a matter of weeks before the French Presidential Election.

Major currencies in detail

GBP

The Pound recovered from its initial sell-off on Wednesday morning to end London trading 0.1% higher.

The UK government will now have two years to conclude Brexit negotiations with the European Union after the triggering of Article 50. Theresa May’s letter to European Council President Donald Tusk was unsurprisingly fairly upbeat, although it warned that reaching a comprehensive agreement within the allotted timeframe would be a challenge.

Political developments remain the main driver for Sterling, absent any major economic announcements this week.

EUR

Dampening expectations for higher interest rates in the Eurozone this year sent the Euro 0.4% lower yesterday.

German import prices rose more than expected in February according to data released yesterday. Prices rose 7.4% on a year previous versus the 7.0% consensus, adding to the general improvement in inflationary pressures within the currency bloc.

Consumer and business confidence data will be released in the Eurozone this morning. German inflation figures could also give us a decent idea as to the strength of tomorrow’s Eurozone wide inflation numbers.

USD

The US Dollar index rose 0.3% yesterday after the release of the Reuters report on the ECB.

Federal Reserve member Charles Evans spoke yesterday, adding to the recent list of central bank speakers in the US that have called for multiple interest rate hikes this year. Evans claimed that there were notable upside risks to growth, with inflation on course to reach its target. He noted that 3 hikes this year were possible, although that there would need to be an improvement in economic conditions for the Fed to raise rates on four occasions in 2017.

Revised fourth quarter GDP numbers will be released this afternoon, although are unlikely to shift the Dollar given the data’s lag.

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