Trading formal Brexit trigger – Article 50

General Information

UK Prime Minister Theresa May is going to file divorce papers on March 29 at 14:30 pm MT time. This will start a two-year process for the UK to negotiate its trade terms with the EU.

European Council President Donald Tusk announced that he will distribute the draft Brexit guidelines among the EU member countries within 48 hours of the UK invoking Article 50. A more detailed stance will probably be delivered later, and the official negotiations may not start until June.

Positions of two parties in the talks

UK

Ms. May’s main objectives include getting a good free trade deal, continuing working together with EU members on such vital issues like security. Also, UK Prime Minister has indicated that she is ready to lean towards a hard Brexit if needed to restore UK control over immigration.

EU

Michel Barnier, European Chief Negotiator for Brexit, has recently hinted on Twitter that the remaining EU members are determined to impose customs controls despite May’s intentions to secure a “frictionless trade.” As Jean-Claude Juncker once claimed in his speech: Britain’s example will make everyone else realize that it’s not worth leaving”. Also, he added that the UK officials should understand that two-year period is not long enough for Britain to secure comprehensive trade deal with EU.

So, as we may observe both parties took rather hard stances in the negotiations. It seems that it Is going to be the toughest negotiations ever held in political history.

What will be the pound’s reaction? Will be there an additional slip in the currency’s value? Let us ask strategists from Barclays.

Barclays

Barclays’s strategists expect the invocation of Article 50 on Wednesday will initiate a “sell the rumor buy the fact” rebound in sterling from its historic lows in the longer-term as ambiguity over Brexit process recedes. A selloff of the British pound that originated after the referendum result of June 23 will probably fade away with the acceleration of the Brexit negotiation process.  And GBP will regain its “fair value”. For the time being, markets have really overestimated the downside to GBP, but a number of fundamental factors such as positioning, hedging, risks to monetary policy should offer a modest support to GBP.

Overall

The majority of market participants are still betting on the further currency devaluation after the official announcement. But it shouldn’t be extreme, given the fact that the political risk of Brexit is well priced in. There might be a reversal in market’s bearish sentiment, as at the present it is so negative that it could be hard to find more sellers.