Pound Wins Holiday From Selloff on Resistance to No-Deal Brexit
(Bloomberg) -- For Brits looking to escape the U.K. in an increasingly wet August, the pound might offer some relief with a recovery against the euro.
Sterling ended a record run of losses against the common currency this week and analysts are cautiously optimistic on its near-term prospects. Growing resistance among opposition lawmakers to a no-deal Brexit has led traders to cut the probability of the U.K. leaving the European Union on Oct. 31, while a lot of pessimism is already baked into the market by fund managers.
Sterling has had a tumultuous few weeks since Boris Johnson succeeded Theresa May as U.K. Prime Minister, with a promise to deliver Brexit on Oct. 31 “do or die”. That saw the pound extend its slide against the euro to 14 straight weeks and had fund managers and strategists considering the risk of a plunge to parity against the dollar.
With the pound recovering 2% in the past five days to 91 pence per euro and bouncing above $1.21 after Labour leader Jeremy Corbyn sought rival parties’ support, the market’s bearish view might be coming under pressure, according to Jordan Rochester, a currency analyst at Nomura International Plc. He sees the odds of Brexit by October at 41% now, from over 50% earlier this month.
“The market is clearly witnessing a further position reduction on the Remainer news flows” and this is supporting sterling, Rochester said. “The pound remains hostage to the latest random and unpredictable headline from politicians. It seems clear that a vote of no confidence is a positive and the market has now assigned a higher chance of that going through.”
Before the latest bounce back, hedge funds and asset managers were continuing to add to short positions, with the latter the most pessimistic on sterling since records began in 2006, according to data up to Aug. 6 from the U.S. Commodity Futures Trading Commission.
There is little time for opposition lawmakers to call a vote of confidence in Johnson after Parliament returns from its break on Sept. 3 to force an election before the deadline, with Corbyn’s proposal to lead a caretaker government also having received a mixed response.
It might take an extension to the Brexit deadline to produce an election and provide “some near-term relief” for the pound, said Fritz Louw, a currency strategist at MUFG.
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