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Categorized | Currencies

Flighty pound rises above Brexit cloud

Posted on November 22, 2016

A second straight day of sudden moves in the pound underlined why investors and traders are wary about betting on a clear trend for the currency until there is further clarity over the shape Brexit will take.

The pound traded half a per cent down against the dollar on Tuesday, triggered by a sell-off that unfolded inside a few minutes that took sterling to just above the $1.24 mark. On Monday, a minute’s trading saw sterling jump 1 per cent to just below $1.25, and left the euro worth less than 85p for the first time since the middle of September.

Even though the pound is roughly where it stood at its pre-flash crash level on October 7, intraday moves have frequently been volatile. The overall direction of the pound this month has been upward, with sterling the only major currency to register an advance against a resurgent dollar since the US election. It has climbed 1.6 per cent against the US currency this month.

A number of reasons have helped propel sterling higher this month, including the US election. Adam Cole, a currency strategist at RBC Capital Markets, said the dollar rally that has followed Donald Trump’s victory was positive for sterling because of the UK’s financial links to the US.

“Cyclically, sterling behaves like a mini-dollar,” said Mr Cole.

The newfound resilience of the currency is even more marked against the euro. Sterling has also gained against the single currency in November, rallying by more than 5 per cent, as market attention turns towards political risk in Europe. The euro is also sharply down versus the dollar, with some in the foreign exchange market dusting off predictions that a fall to parity is now a realistic possibility.

Strategists at Société Générale forecast that the exchange rate could hit parity before the French presidential elections in April. “Nervousness about the political outlook and potential for yet another populist surprise will keep the euro under pressure,” the French bank said.

Some analysts put sterling’s rise on Monday down to Theresa May’s promise to lower corporate tax, while Tuesday’s fall may be investors reining themselves in ahead of Wednesday’s Autumn Statement. from the government on economic policy.

Brexit developments, though sparse in recent weeks, are continuing to shape the pound. Against the backdrop of the gap in bond yields widening against the US as the Treasury market sells off, Simon Derrick, a macro strategist at BNY Mellon, warned that “any negative political news could trigger a relatively sharp move lower in the currency”.

That was echoed by Thu Lan Nguyen, FX strategist at Commerzbank, who said Brexit remained a quandary for the UK government, arguing “the potential for a reversal in Sterling thus remains high”.

Longer term, some are optimistic about sterling’s prospects. In its outlook for next year, UBS Wealth Management said it regarded the pound as an undervalued currency. “The British pound will be vulnerable during Brexit negotiations, but should trade stronger once greater clarity emerges,” the report said.