How to trader the GBP when Theresa May pulls the Brexit trigger

British Prime Minister Theresa May will trigger Article 50, which is officially starting the U.K.’s withdrawal from the European Union.

The British pound weakened by 17% against the dollar since Britons voted on June 23 to leave the EU.

While traders rushed to bet against the British currency, some strategists believe that you should not join them. Other strategists say it is still too early to be optimistic about the pounds.

"Sell the rumor, buy the fact"
The predictions of a sterling fall to $1.10 against the U.S. dollar from a number of credible sources seem more designed to generate headlines than be grounded in any type of economic reality. Most of the economic downside is largely already priced in, which would suggest that, as long as we stay above the recent lows, then the risk remains more to the upside than the downside.

The prevailing narrative also ignores the fact that the pound has been in a steady decline since the end of 2015, down for six quarters in a row, which is its worst losing sequence since the 1980s.This alone would suggest that the scope for further downside remains limited to an outside risk scenario, or a very low probability.

That doesn’t mean it won’t happen, but on a risk/reward scale ratio, there is more risk attached to being short with the crowd, given we are already at multiyear lows, which means on that basis alone the pound is cheap.

If anything the act of triggering Article 50 could be one of those ‘sell the rumor, buy the fact’ type of trades that has the potential to drive the pound up towards its recent highs and towards the $1.30 area, where it was prior to the recent Bank of England rate cut in August, according to Michael Hewson, chief market analyst at CMC Markets UK.

Do not buy a "super-long recovery"
Jameel Ahmad, vice president of FXTM, says that he still holds negative views on the British pound. He will not be buying into the theory that this could be the start of a prolonged recovery until the GBPUSD manages to conclude trading on a weekly or monthly basis back above $1.32. This is a strong psychological level and passing over it would mean that the bearish bias are likely to be completed.

Potentially reduced short future?
If in the coming weeks, the economic data still remain resilient and immune to all the shocks, that could be very positive for the currency and for the equity market. It is highly likely that the short squeeze could push the sterling towards the level of $1.30 in no time, and we also see some new record highs for the FTSE 100 index UKX - according to Naeem Aslam, chief market analyst ThinkMarkets UK.

Details are plus
Over recent weeks, it has been Brexit headlines that have given the pound its upside, with sterling trading at an eight-week high against the greenback. The more detail we get, the more traders see it as an ease in the uncertainty that has caused the downside.

With Article 50 set to be triggered and the formal negotiations about to begin, this can only bring more detail, something that should continue to be good news for sterling, according to James Hughes, chief market analyst at GKFX.

Source: MarketWatch

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