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GBP EUR, GBP USD Weaken as Traders Profit on Recent Pound Brexit Surge

Update: The volatility surrounding the activation of Article 50 has abated, with profit-taking on the Pound’s recent surge pushing GBP exchange rates lower against EUR and USD.

While GDP remained at 0.7% quarter-on-quarter at the end of 2016, business investment continued to shrink and consumer confidence remains ‘cagey’ according to GfK.

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Pound exchange rates are fluctuating widely around opening levels this morning as markets struggle to price-in the activation of Article 50.

Theresa May last night signed the letter informing EU leaders of the UK’s intent to withdraw from the project and UK-EU Ambassador Sir Tim Barrow is currently in Brussels to hand-deliver the missive to European Council President Donald Tusk.

The letter will begin two years of negotiations, in which Theresa May attempts to secure some form of common market access and special dispensations for industries such as financial services and automotives to allow them to continue accessing the single market.

GBP EUR and GBP USD exchange rates initially slumped when trading opened for the morning, but have since recovered and are now recording bullish gains against the Euro and a strong advance against the US Dollar.

The volatility is unrelated to Article 50, Kathleen Brooks of City Index claims. ‘It’s worth pointing out that the Pound actually rallied when Downing Street announced the date of the triggering of Article 50 last week, and the prospect of a second Scottish referendum didn’t impact the Pound when it was first touted a couple of weeks ago,’ she explains.

‘Thus, these events are not the key driver of the Pound right now. Instead, we believe that the [US] Dollar recovery will be more important for the Pound in the coming days.

Indeed, Sterling seems largely unaffected by comments from Chancellor Philip Hammond that the government had accepted ‘we can’t cherry pick, that we can’t have our cake and eat it,’ and that Brexit would have ‘consequences’.

Investors had rushed into the Pound at the start of the week, seeking safety after the outlook on the US Dollar rapidly weakened.

Donald Trump’s health bill, designed to replace Obamacare, failed to win enough support from his own party to make it through Congress; something which unnerved investors who are eagerly waiting for his promised fiscal stimulus and tax reforms.

With the Euro facing several more Eurozone elections, uncertainty in Greece and Italy and, at the time, seemingly no end to European Central Bank (ECB) dovishness, the Pound seemed a less-risky asset, even if not traditionally considered a ‘safe-haven’.

As has been seen on several previous occasions with Brexit related news, it is actually the Euro, not the Pound, which is taking the brunt of investor skittishness.

A survey released by the Association of German Chambers of Commerce and Industry (DIHK) suggests Brexit could have an adverse effect on German businesses.

DIHK estimates exporting to the UK supports 750,000 jobs in Germany, so it is worrying that 40% of the 1,300 businesses that responded to the survey expect to do less businesses with the UK as the Brexit negotiations unfold.

While maintaining freedom of movement for goods was a priority for 88% of German businesses, DIHK President Eric Schweitzer commented that the EU allowing Britain too many concessions would do more harm to the integrity of the single market – and therefore more damage to international German businesses – than denying the UK access.