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How will Article 50 of the Lisbon Treaty Affect GBP Trading?

GBP and Brexit
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March 29, 2017 By: , No Comments

The UK government is poised to pull the trigger on Article 50 of the Lisbon Treaty on Wednesday, 29 March 2017. This complicated legal directive will officially begin Brexit proceedings. Recall that Britons voted overwhelmingly in favour of a Brexit on June 23, 2016. It is now Prime Minister May’s mandate to begin the extrication proceedings. After Article 50 of the Lisbon Treaty has been initiated, the UK will have 2 years to withdraw from the EU. Whether or not a blueprint is in place is irrelevant – the UK will no longer receive the benefits associated with being a member of the 28-nation bloc.

Article 50 Lisbon Treaty

 

How Is the GBP Affected by Brexit Proceedings?

The performance of the GBP has been surprisingly resilient in the face of mounting volatility since the Brexit decision. The short-term aftermath of the Brexit had the pound crashing to a 31- year low, trading beneath the key 1.20 level. However, the GBP has rallied since then, and is now at multi-month highs against the greenback. On Tuesday, 28 March 2017, the GBP/USD pair was trading at 1.2551, down slightly from the previous day’s close. Recall that dollar weakness has been driving up the GBP/USD pair, not pound strength.

 

Recent failures of the Trump administration have helped to propel weakness in the greenback, including the pulling of the healthcare bill from the House floor, the blocking of several executive orders on immigration, and ongoing scrutiny about Trump’s associations with Russian operatives. The presidency is mired in scandal and low public approval ratings. This does not bode well for reflation expectations in the US, and the USD has fared accordingly. The GBP has taken some flack in recent months, but concerns about the rise of the right in Europe have also helped to temper EUR strength and bolster the GBP. There is talk that the Bank of England may move towards rate hikes in the near future, reversing a policy of monetary accommodation.

 

Sage Advice from Currency Analysts

GBP/USD traders will likely be positioned to place call options on the GBP in April, given the historic weakness of the USD every April since 2006. Typically, the USD depreciates by as much as 1.5% in April, followed by a reversal in May. If the trends are set to continue, currency traders will benefit from buying the GBP/USD pair ahead of April’s moves and then selling it in May. The reason for the decline in the USD during April is the decline in US treasury issuance. This means that foreign purchases of US treasuries are typically reduced during April, meaning that less dollars are demanded.

 

This weakens the currency. That foreign direct investment is essential to the strength of the USD, and its absence will certainly bolster the GBP. While US treasury issuance is weakest during April and December of every year, US mutual funds typically grow in April of every year. As a result, currency analysts are recommending that traders sell the USD/CAD and buy the GBP/USD pair ahead of April’s economic data releases. Of course, caution needs to be thrown to the wind given that Wednesday’s official Brexit decision will add significant pressure to the GBP. It is unknown how this will impact the April trends for the USD.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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