The Pound's Bad Day Could Have Been Much Worse
Implied volatility on pound-dollar options declined after the votes in Parliament, led by the shorter expiries.
(Bloomberg) -- The pound has proven unexpectedly robust despite the drumbeat of bad news surrounding Brexit. Fund managers and analysts say this may be time to sell.
While sterling slipped on Tuesday after lawmakers rejected the latest Brexit plan, the currency remains within 1 percent of a three-month high set last week. It crept higher in Asian trade Wednesday amid optimism politicians will eventually find a way to resolve the impasse.
“People seem optimistic today but in reality though, sterling’s going to find it hard work to stay above $1.32,” said Jeffrey Halley, senior market analyst at Oanda Corp. in Singapore. “What we’re seeing today is profit-taking pushing the pound up as traders take back shorts from the New York session.”
The pound has strengthened 2.6 percent this year to trade at $1.3091 as of 6:28 a.m. in London, the best-performing Group-of-10 currency this year after Canada’s dollar.
U.K. Prime Minister Theresa May now heads to Brussels after promising to renegotiate the most contentious part of her Brexit deal. She has two weeks to make progress and placate enough of her divided Conservative Party before facing Parliament again.
It remains difficult to be positive on sterling as Brexit continues to unfold, according to Raymond Lee, a money manager at Kapstream Capital in Sydney.
“The global risk-on rally may have given GBP some tailwinds upwards,” he said. “I would say for those that have been long GBP, now is probably a good time to take profit.”
The pound will slip back to $1.30 or lower due to the rising risk of a no-deal Brexit, said Westpac Banking Corp.’s Sean Callow, the most accurate forecaster of the currency last quarter. “We view the parliamentary votes as a setback for the pound,” he said.
Here are what other strategists are saying about the pound and Brexit:
CMC Markets (Uncertain Outcome)
“The ball is now kicked to the EU to review this revised deal,” said Margaret Yang, market analyst in Singapore. “Technically, the pound has retraced and attempted to test its 10-day daily-moving average support at around $1.303 area. Immediate resistance remains at $1.32.”
Commonwealth Bank of Australia (Further Pressure)
“Further pressure likely while Parliament chases the ‘Brexit fairytale,”’ said Richard Grace, chief currency strategist in Sydney. “GBP/USD should fall further if EU officials keep their word and reject any changes to the Withdrawal Agreement’s Irish backstop, as we expect.”
ING Groep (Struggles Ahead)
“The risk remains that politicians still haven’t coalesced around a plan of action for Brexit and the uncertainty continues,” James Knightley, chief international economist in London, wrote in a note. “This uncertainty will ensure sterling continues to struggle in the coming days and weeks, business contingency plans intensify -- diverting attention away from growth opportunities -- and the prospect of any Bank of England monetary policy tightening further recedes.”
--With assistance from Michael G. Wilson.
To contact the reporters on this story: Ruth Carson in Singapore at rliew6@bloomberg.net;Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Nicholas Reynolds
©2019 Bloomberg L.P.