Sterling fluctuates amid Brexit anxiety; major volatility expected in coming months

How to play Brexit

Money managers should be ready for "a lot of inefficiency" and currency fluctuations given Prime Minister Theresa May has now launched the official process of the U.K.'s exit from the European Union (EU), a legal expert has told CNBC.

Sebastian Vos, co-chair of global public policy and government affairs team at legal firm Covington, warned currency traders that they should expect lot of uncertainty surrounding the negotiations in the coming months. Vos, a former member of the European Commission, added that sterling could gain or lose 50 percent of its value as the talks unfold.

Expect clear Brexit negotiating positions by the summer: Pro

While the current market reflects a very short consensus positioning in sterling, some commentators, including BNP Paribas's Edmund Shing believe the negativity could be overdone.

"The currency is under pressure, people are 'shorting' it like crazy – I think there's huge upside there," Shing, global head of equity derivative strategy at the French bank, told CNBC Wednesday.

GLG's Henry Dixon also highlighted to CNBC that on a purchasing power parity basis - which evaluates a currency's theoretical equilibrium versus other currencies based on the price of a basket of goods - the British pound looks very cheap against the U.S. dollar and "fractionally" cheap against the euro.

Adding another consideration to the mix, the GLG fund manager advised traders to consider where currencies with comparable political set-ups vis-a-vis the EU trade.

"Look at the Swissie (Swiss franc), look at the (Norwegian) krone … History will relate that these currencies which are on the fringes of Europe but not in it are actually surprisingly strong," Dixon noted.

"I don't think it's the one-way bet that everyone thinks it is to the downside," he concluded.

Strong inflation data

Strong export, import and inflation data from the U.K. in recent months have also reduced the likelihood of further monetary policy easing from the Bank of England (BOE) and should consequently alleviate some pressure on sterling, according to research sent to clients from Singaporean bank, DBS, on Wednesday.

Never been a bigger short interest in sterling than we have today: Pro

"According to the higher interest rates and bond yields projected by consensus, the market has started to wonder when the BOE would start raising rates again. Hence, we remain guarded against excessive bearishness and see GBP/USD trending modestly lower within its price channel," explained the DBS analysts.

Looking ahead to consider what effect the actual triggering of Article 50 will have on sterling, analysts at Capital Economics, suggest that the event could see a return of the so-called "hard-Brexit discount" that has faded in recent weeks.

'Skeptical that such an effect will materialize'

"But we're skeptical that such an effect will materialize. While the triggering of Article 50 is a major step along the road to Brexit, it will hardly come as a shock. Any suggestions that the U.K. might not actually leave the EU disappeared months ago," contended the economists.

"Indeed, it's perhaps more likely that the formal commencement of Brexit will give the pound another boost. If the U.K. government's letter announcing Article 50 contains conciliatory language, and this is echoed in the response from the EU, then hard Brexit worries could certainly dissipate somewhat further" the note added.

Triggering Article 50 tells us no more about Brexit: BNP Paribas

Positioning in the currency markets saw the pound slip in early trade on Wednesday morning before finding its feet and trading mostly flat against the U.S. dollar in the run-up to the official triggering of Article 50 – which kickstarted the negotiations between the U.K. and Brussels shortly before 12:30 p.m. London time. Sterling had hit a low of around 1.2385 against the U.S. dollar overnight after starting the week close to 1.2564. Early in Wednesday's session, sterling had also fallen against the euro.

By 13:30 p.m. London time, sterling had resumed its downward path once again, hovering around the 1.2394 mark against the U.S. dollar. The British currency was marginally higher against the euro, however, sitting at 1.1542 or 0.52 percent higher intraday.

The currency has been on a wild ride in the fallout since the Brexit vote – including hitting a 31-year low last year - and a slew of traders are betting the currency will depreciate further in the coming months.