The pound took a tumble on Tuesday after politicians paved the way for Article 50 to be triggered this month, leading analysts to warn that Brexit was still not priced in to the value of the UK currency.
Sterling fell as much as 0.9 per cent in Tuesday morning trading to just above $1.21, its weakest level since Theresa May, prime minister, promised a parliamentary vote on a Brexit deal eight weeks ago. Against the euro, the pound was 0.6 per cent weaker at £0.8772, back toward Monday’s intraday weak point of £0.8788, which was in turn a nadir dating back to January 17.
On Monday night, MPs struck down two amendments to the Article 50 bill made by the House of Lords in recent weeks. Peers then voted to overturn their own amendments, clearing the way for Mrs May to take the next step in the UK’s move towards leaving the EU.
Article 50, the formal notification the UK must make of its intention to withdraw from the EU, is expected to be triggered in the final week of March.
On Monday Nicola Sturgeon, Scotland’s first minister, confirmed she would seek legal authority to hold a second independence referendum as early as next year amid concerns over the impact of Brexit on the Scottish economy.
“I think the market is slowly starting to realise that Brexit is anything but priced in,” said George Saravelos, currency strategist at Deutsche Bank.
“How can you price in an event of incredible complexity that has never happened before? We remain very bearish on the pound — our forecast is for a move close to $1.05.”
Simon Derrick, an analyst at BNY Mellon, said: “The move today could be an early warning of what could happen when we do trigger Article 50.”
Sterling has already lost nearly 20 per cent of its value against the dollar since the June 23 referendum and with the UK economy forecast to grow at 2 per cent this year, some still expect the pound to find support around current levels.
The problem for investors is how to judge the progress of what will be two years of Brexit negotiations. That is why several strategists are reluctant to forecast anything significantly at variance with the pound’s current value during the remainder of 2017 at least.
Silvia Ardagna at Goldman Sachs said too little economic and political downside was priced in to sterling.
“There are signs that momentum in UK economic activity is weakening and we expect lower growth in coming months,” she said. A tough negotiating position from European leaders “should lead to a more negative risk premium being built in to the currency”.
Sterling’s plight helped the FTSE 100 outperform its continental neighbours. London’s main equities index rose 0.2 per cent, while Frankfurt’s Xetra Dax 30 was flat and the Euro Stoxx 600 fell 0.2 per cent.
Additional reporting by Michael Hunter