FxWirePro: Forbes effect likely to be limited on pound

Kristin Forbes, one of the members of Bank of England’s (BoE) monetary policy committee (MPC) surprised the market by voting for a rate hike. The market was surprised in two fronts; first on the voting by Ms. Forbes and secondly, the depths of rate hike discussion that one member voted hike. The UK pound jumped sharply in response. The pound was already higher after FOMC. It was trading at 1.21 against the dollar, a day before the FOMC and today it is trading at 1.239 against the dollar.

However, we believe that this run is not likely to sustain for long. Our calculations at FxWirePro suggest that the pound might move higher further but not beyond 1.26 against the dollar. One of the major reasons for which we feel that the pound has limited upside is the Article 50. According to the British government, Prime Minister Theresa May will be triggering the Article 50 of the Lisbon Treaty in the last week of March, which means that it just days away. While the Article 50 trigger has nothing new in it, we suspect that the market hasn’t properly priced the fact that the European Union is planning to hand over the UK an exit bill costing somewhere between €40 billion and €60 billion, just after the triggering of Article 50 and before the beginning of the exit negotiations.

So, we at FxWirePro remain committed to the downside and by our longer term target of parity with the dollar.