As unfolding political developments added to concerns over the outlook for the U.K., sterling is hovering around its second lowest level against the U.S. dollar since last June’s vote to leave the European Union (EU).

Parliamentary approval to trigger Article 50 and thereby initiate the two-year process by which the country will exit from the EU, was gained by U.K. Prime Minister (PM), Theresa May in a significant day for British political news. Additionally, asking Scots to decide whether their country should break away from the U.K. to take place sometime between fall 2018 and spring 2019, Scotland’s First Minister Nicola Sturgeon announced that she expects a new referendum.

Dipping to around $1.214 shortly after 8am GMT before recovering mildly to hit $1.2124 just before 11am, sterling weakened substantially in early European trade after having demonstrated relative robustness against these events as they developed on Monday.

Politics is currently undeniably in the driving seat regarding currency movements  and compared to many doom-and-gloom forecasts which have proved either premature or exaggerated, the U.K. economy has shown resilience since the Brexit referendum.

The value investors are placing on gaining some clarity as underlined a day ahead of PM May’s speech outlining a more decisive plan and timetable for the exit process, the U.K. currency hit its lowest point since the Brexit vote – and indeed since the 1980s – of $1.204 last January 16.

However, according to Myles Bradshaw, head of global aggregate fixed income at Amundi, the political noise is simply going to escalate once Brexit is actually triggered.

“The bottom line is risk premia and uncertainty remain high for the U.K.,” Bradshaw said.

Given how well telegraphed the triggering of Article 50 has been, it is unlikely to “cause a major stir for sterling,” analysts at Swiss investment bank UBS, cautioned in a note on Tuesday.

“It does however increase headline risk, particularly as the opening negotiating positions of the two sides are far apart,” the analysts added.

Stephen Gallo, European head of FX strategy at BMO Financial Group, said in a TV interview that it is also essential to pay attention to events influencing the trading patterns of sterling’s key counterparts.

“FX investors are going to mainly trade the GBP on the basis of firstly, how the upcoming Eurozone elections turn out and secondly, the tone of the initial Brexit negotiations after Article-50 is formally triggered, and that is basically what has been happening since the start of this week,” Gallo posited.

“Political risks are creeping in to the trading environment for Europe’s largest currencies in a simultaneous fashion, and that is why the dollar index has been buoyant over the last 24 hours,” he added.

Furthermore, Gallo anticipates further pain ahead for the British pound versus its transatlantic partner with markets all but certain that the Federal Reserve will hike U.S. interest rates tomorrow.

“We expect the next big move in GBPUSD to be on the downside, and we see the pair falling to $1.17 in three to five months,” Gallo estimated.

He didn’t expect the Bank of England to enact a similar hike this week, Amundi’s Bradshaw said commenting on U.K. monetary policy. “It’s too early.”

Richard Falkenhäll, senior FX strategist at SEB, in a note on Tuesday added to the voices expecting additional near-term pressure on sterling given the launch of Brexit negotiations.

“Whether this will continue or not in the second quarter depends on where market focus will be. A shift to political risks elsewhere could offer some temporary relief, but this should be seen as an opportunity to sell sterling,” he advised.

(Adapted from CNBC)

Categories: Economy & Finance