Bank of America Merrill Lynch cautions on Brexit
LONDON: Sterling traded within a tight range on Tuesday, outperforming other major peers against the dollar, apparently disregarding Britain's looming formal launch of negotiations on leaving the European Union.
British Prime Minister Theresa May will trigger Article 50 of the EU constitution with a formal notification of Britain's intent to leave the bloc on Wednesday, kicking off a two-year period of exit talks.
The pound, which has yoyoed in the past month between $1.21 and $1.26, inched up 0.2 percent to $1.2584 in subdued morning trade in London.
It was also 0.2 percent higher at 86.30 pence per euro.
"Sterling's in a range ... the market is incredibly quiet," said Kit Juckes, currency strategist at Societe Generale. "Not a lot happens in the first 100 yards of the marathon. I'm not sure why the market would react to Article 50 - it's not obvious."
Most analysts say the triggering of Article 50 will only have symbolic significance for investors, with the real driver for sterling being the EU's response and the health of the British economy going forward.
"What many market participants may be underestimating is how difficult the negotiations would be ... because the pound has been doing quite well recently and hasn't been under pressure much since we got this news (date for Article 50 trigger)," said Thu Lan Nguyen, a currency strategist with Commerzbank in Frankfurt.
Stronger than expected UK inflation and signs the Bank of England was edging towards raising interest rates have helped the pound over the past two weeks.
It hit a two-month high of $1.2615 on Monday in a move driven chiefly by broader weakness of the dollar.
But uncertainty surrounding the terms of Britain's exit from the EU continues to weigh on the currency, still down by nearly 20 percent since last June's Brexit vote.
Mark Horgan, chief executive with corporate and retail currencies provider Moneycorp in London, said that nerves ahead of the declaration were highest among ordinary individual customers buying euros to purchase houses in Europe.
"People are extremely nervous, though it is probably in the retail space rather than corporates," he said.
"Companies seem to have got their heads around this event now. There has definitely been a rise in hedging. They are flat going into this thing."
Investors fear that a "hard" Brexit - one in which Britain would lose access to its largest trading partner - would damage the British economy, which is showing signs of faltering.
Worries also grow that Britain's exit negotiations could be tough and protracted, as both Theresa May and European leaders take bold opening stances.
Adding to unknowns for investors has been rumblings of another Scottish independence referendum, which threatens a potential break up of the UK just as it departs the EU.
Scotland's devolved assembly resumes a debate on Tuesday on independence that is expected to give its First Minister Nicole Sturgeon authority to demand a second referendum. - Reuters
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