Pound above pivotal level as Brexit trigger pulled

Sterling rebounded from its lows and rose above crucial market levels for traders on Wednesday, as the UK formally notified Brussels of its intention to leave the EU.

After early selling sent the pound below $1.24 to the US dollar, the currency climbed back above its 50-day moving average of $1.2427 against the world’s reserve currency. The pound was up 0.2 per cent at $1.2471 as Theresa May, the UK prime minister addressed Parliament, only to fall back to the flatline in afternoon trade at $1.2453.

Moving averages are widely followed measures of momentum that investors use to track price trends over various durations. When market price either rises or falls through such technical levels, it can be taken as an important signal that accelerates the current trend.

“We need to watch these levels carefully as a nudge lower could bring back speculative and trend-focused short sellers to the pound again,” said Koon Chow, foreign exchange strategist at UBP.

“This is a developing negative sign for the pound. Sterling bears have had a tough time since October, but they are still out there and watching closely.”

The timing of sterling’s moves with the long-awaited events in Brussels — where the UK’s ambassador formally delivered the prime minister’s written notice of the country’s intention to leave — looked largely coincidental.

Kit Juckes at Société Générale said the “political shock is surely mostly priced in”, adding: “Where the pound goes now depends to a very large degree on economic data. The danger is that the economy slows even as the UK has a sticky inflation rate.”

Simon French, chief economist at Panmure Gordon, predicted “a gradual realisation of the costs of Brexit” that would amount to “a slow drag” on sentiment towards the pound.

“This is set to begin from the second half of 2018, with a more acute risk in the first quarter of 2019 as a potential cliff edge emerges for additional tariff barriers and customs procedures.”

The pound remains well below its 200-day moving average of $1.2681, and since the vote for Brexit last June, the currency has failed to rise above that long-term level.

Kamal Sharma at Bank of America Merrill Lynch said the pound had spent the first quarter of 2017 locked within a $1.20 to $1.27 range.

“Since the pound has yet to break the fourth-quarter low of $1.1841, “another major low could be worth buying”, he said.

The trading pattern for the pound on Wednesday remained characterised by stable levels of implied volatility. Indications of one-month implied volatility were quoted at a level of 8.67, up only marginally on the day. After the Brexit vote in June, the measure almost surpassed 29.

Market opinion is split on the significance of technical levels. While some investors follow it closely, others remain unconvinced that it dictates market direction.