Pound / Dollar Rate to Fall Back Down on "Prolonged Uncertainty"

The British Pound to Dollar exchange rate (GBP/USD) will likely resume its downtrend now that the Supreme Court has ruled Parliament is the only body that is able to trigger the UK’s exit from the European Union say foreign exchange strategists at ING.

The call comes as Pound Sterling fell on the Supreme Court's ruling on which organ of state has the power to trigger Article 50 of the Lisbon Treaty which allows for a member state of the European Union to legally begin withdrawing from the Union.

The Court judged that Parliament will have to allow the triggering of Article 50 - a decision expected by analysts and foreign exchange traders alike.

The decision initially hurt the Pound but we have since witnessed the UK currency stage a comeback.

Nevertheless, "political uncertainty has increased: amendments and blockages by opposition parties to any Brexit bill proposed by the government will only slowdown the process of the UK leaving the EU," says analyst Viraj Patel at ING. "This will prolong uncertainty; price action since the Brexit referendum confirms that uncertainty is unambiguously GBP negative."

All eyes will now be on the wording of the Government's Brexit bill due on Thursday.

ING believe the ruling also serves as a bit of a reality check that the UK will be exiting the single market and that the path towards a 'hard' Brexit remains firmly on the table.

Analysts say that unless opposition parties can have a greater say on the Brexit process (i.e, steer the strategy once negotiations are underway or completed), markets will continue to price in the risk of a 'hard' Brexit.

“This again will keep the downside GBP bias in place,” says Patel. “Strategically, we remain bearish on GBP/USD and see risks of a move down towards 1.21 over the coming weeks - especially once markets reconnect with the idea of Trumpflation.”

ING thus fall into that school of institutional forecasters that believe a hard Brexit has not been fully priced into Sterling, and further downside is therefore likely.

According to Patel initial support comes in around the 1.2430/40 area, though he would expect this to give way, with fresh bearish GBP bets leading to further downside.

With regards to the Pound v Euro, analysts at Danske Bank agree that the Sterling is likely to head lower over coming months.

In a note following the ruling analysts say they still think the UK is heading towards a hard Brexit, as the UK cannot stay within the single market and get control over EU immigration at the same time.

"We still target EUR/GBP at 0.88 in 3M," says a note from Danske.

This equates to 1.1364 in GBP/EUR terms.

Brexit Bill Updates:

The Government responded to the Supreme Court ruling by announcing they will be introducing a Brexit Bill to Parliament on Thursday January 26 in order to ensure Article 50 is triggered by March.

The SNP have promise to load the Bill with 50 amendments when it comes before the Commons - if successful we see this as being Sterling-positive as it would likely soften the kind of Brexit we can expect.

The nine Liberal Democrat MPs have vowed to vote against the Bill unless the government offers a second referendum on the Brexit final deal.

The Labour party called on the government to offer a "meaningful vote" on the final deal she negotiates with the EU - which must be called before the agreement is signed.