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Here’s what could happen to the pound when Article 50 is triggered

The UK government is on the brink of triggering Article 50 that would mean the start of official divorce proceedings between Britain and the European Union.

While sterling is trading half a percent higher against the dollar after Scottish First Minister Nicola Sturgeon called for a fresh referendum, a number of forex analysts believe the currency could see some near-term weakness.

"While we expect near term GBP negativity, note the macro-economic challenges ahead are tough, we would assume that both the Treasury and the BoE are now too optimistic upon growth we do not necessarily expect aggressive fresh sterling extremes, this comes as the market has already discounted most of the bad macro-economic news," Jeremy Stretch, head of G10 fx strategy at CIBC, told CNBC via email.

Stretch further explained that for euro/sterling the question is how pragmatic or otherwise will the EU eventually prove to be.

"A dogmatic politically inspired response to Brexit would boost discussion of mutually assured destruction. If we assume that Europe avoids a near-term political meltdown that will boost the sterling against the euro, but we do not assume forecasts in excess of 0.90, even if the ECB look to row back on stimulative monetary policy into the third or fourth quarter."

Sterling has witnessed a roller-coaster ride in 2016 as the currency plunged to levels not seen in more than a generation on the back of the Brexit vote. While the initial moves were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the pound continues to remain under pressure at current levels of $1.22. The currency is down more than 17 percent since the referendum day.

Kallum Pickering, senior UK economist at Berenberg, explained in a research note that the value of sterling remains the best barometer of market sentiment. If May takes a non-confrontational approach and signals a desire to maintain a high degree of openness to the UK for EU workers, markets could react positively in the coming months, Pickering explained.

He however warned that based on May's rhetoric up to now, she will likely continue to heed the populists' call to clamp down on migration instead and this could set the stage for more downside for sterling.

British one pound sterling coins.
Jason Alden | Bloomberg | Getty Images
British one pound sterling coins.

But with the imminent trigger of Article 50, some market pundits also think that sterling will rebound since there is greater clarity on the issue now.

"We expect that GBP will begin a steady rebound from depressed levels. Greater clarity surrounding the negotiations will prompt a stronger currency, as the worst case scenario for Brexit is already priced in," Martin Arnold, director, research, fx and macro strategist at ETF Securities, told CNBC via email.

However, Arnold warned that uncertainty surrounding Scotland and any negative news surrounding negotiations will cap the GBP's gains in coming months.

"Uncertainty and volatility are the enemies of the Pound, but the plunge in the Pound over the past nine months has been exaggerated," Arnold added.

The First Minister of Scotland Nicola Sturgeon said she expected a referendum to take place sometime between fall next year and spring 2019.

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