Sterling rallied against the US dollar ahead of the trigger of Article 50, trading just above its level before a hawkish speech by a Federal Reserve official pushed up the dollar last night.
The pound fell briefly below $1.24 against the dollar overnight, while the trade-weighted dollar index made back some of last week’s losses from the failure of US President Donald Trump’s healthcare bill.
In volatile trading this morning sterling made back its losses before paring slightly to $1.2453 at the time of writing.
Traders are braced for the trigger of Article 50 this afternoon, with the expected publication of the notification letter giving the government a chance to give the first clear indication of its negotiating strategy.
The Prime Minister will make a statement to the House of Commons after Prime Minister's Questions. The letter will then be published.
The letter, and the first response by European Council president Donald Tusk expected at 12:45, will set the tone for the first months of the negotiations.
Simon French, chief economist at Panmure Gordon, said: “Today’s commencement of the Article 50 process does not materially alter the Brexit heuristics/rules of thumb being used by UK households and business.
“As such we anticipate little reaction in real activity over the coming months. Indeed an early clarification on the right–to-remain of EU-born workers has the potential to provide a near term fillip to consumer confidence.”
Dollar strength was prompted by a Federal Reserve official's speech highlighting the probable policy divergence between America and the UK ahead of the historic trigger of Article 50.
The US Fed’s influential vice chair Stanley Fischer last night said two more interest rate hikes this year seemed “about right”, after the central bank had surprised markets with a more dovish stance than expected, despite raising rates.
Demand for US government bonds dipped. The yield on the benchmark 10-year US government Treasury (which moves inversely to prices) rose to highs of 2.425 per cent according to Tradeweb.
Investors are not expecting a rate hike at the Fed’s next meeting on 3 May, with calculations from CME Group based on federal fund futures implying only a 6.4 per cent probability of rates rising. However, a hike at the meeting on 14 June is now odds-on, with a 50.7 per cent probability.
This stands in contrast to the UK, where the Bank of England is widely expected to hold off any move on monetary policy until the end of 2018 at the earliest. The Bank is unlikely to tighten the supply of money at a time when the UK will be carrying out complicated trading negotiations.