“On that note, we saw a major shock to sterling, which resulted in a very far deviation from fair value, even after taking into account the potential changes in the structure of the UK economy after Brexit, so this had to correct.”
Another driver that will help sterling from devaluing further is the fact the dollar has reached its peak, according to Yu.
“As much as we think sterling has bottomed, we think the dollar has peaked as well.”
“Many people might not think of the US as a major exporting economy but actually a lot of its corporate sales and 45% of the Dow Jones Industrial Average are overseas driven so there is an impact and the Federal Reserve has been very clear on this.”
Even if the pound does descend to $1.20 against the dollar in the short-term, it is unlikely that markets will start shorting sterling, however.
“The market has really moved on from the short-sterling Brexit trade because how much more is there really to be priced in based on UK specific information alone?
“I think it will be more interesting to see what the European response will be. Depending on whether it generates a surprise or not, that may be more important for currency compared to Article 50 being triggered itself.
“Tomorrow is the formalising of what we know already. There is no reason to overplay it as a significant driver.”
