European financial markets endured a choppy day of trading on Wednesday as markets digested the UK's formal pressing of the start button on leaving the European Union.
Sterling rallied as much as 0.7 per cent against the euro on Wednesday afternoon as British prime minister Theresa May and European Council president Donald Tusk both vowed to pursue an orderly UK exit from the bloc.
However, sterling ended the European session up just 0.2 per cent at 86.7p.The UK currency could well have shed its gains had it not been underpinned by a Reuters report that the European Central Bank will assure markets next month that its policy of easy money is far from ending.
The UK currency fell 0.4 per cent against the dollar to $1.24.
"In our view, the current value of sterling does not factor in the complexity of negotiating the UK's exit from the EU or the headwinds the economy is going to face, and we expect sterling to retest 90p against the euro in the near term," said Cantor Fitzgerald analysts in Dublin.
While only 76.6p was needed to buy a euro just before the Brexit referendum last June, it breached the 91p level in October as it became increasingly likely that the UK was heading towards a so-called hard Brexit.
Market rally
The FTSE 100 rallied late in the session, closing 0.4 per cent higher at 7,377.72. The index, dominated by exporters, benefited from sterling weakness against the dollar. The Iseq also spent Wednesday dipping in and out of negative territory before closing down 0.1 per cent at 6,577.03. The pan-European Stoxx 600 index ended the session up 0.3 per cent, recovering from earlier losses.
As Britain's EU ambassador handed over a letter giving notice of the UK's intention to quit the union, Ms May told the House of Commons that the government would approach two years of talks "in the spirit of sincere co-operation". In response, Mr Tusk said the EU's "first priority will be to minimise the uncertainty caused by the decision of the United Kingdom for our citizens, businesses and member states".
Both statements were "conciliatory" in tone, according to Justin Doyle, a senior foreign-exchange trader at Investec in Dublin. But analysts concluded that the talks will be difficult and the markets will be prone to being spooked.
"The triggering of article 50 was well anticipated, but the fact negotiations are now live means financial markets may become more vulnerable to commentary from European and UK officials as to how well, or poorly, initial discussions are going," said Michael Metcalfe, head of macro strategy for State Street Global Markets.
“Headline risk is back, if it ever really went away.”
Draft guidelines
On Friday, Mr Tusk will send the 27 other EU member states draft negotiating guidelines. It will be the end of April before EU leaders convene for their first Brexit summit.
"The UK continues to want to reach agreement on a comprehensive new deal with the EU-27 in parallel with the terms of the divorce by March 2019, an unrealistic timetable and one the EU-27 opposes," said Mark Wall, an economist with Deutsche Bank in London.
“Detailed negotiations are only likely to start in June,” he added. “In the next few days, it will also be worth closely monitoring rhetoric from both the UK and EU-27.”
