Pound’s rally vulnerable to fickle Brexit sentiment
athens — The pound’s rally against the euro last week, spurred by greater optimism on the Brexit talks, may be vulnerable to fastchanging sentiment toward the negotiations as investors look ahead to the factors that may drive moves in the currency pair in 2018.
Sterling was set on Friday for its best week in more than two months against the common currency following signs that the impasse on the UK’s divorce bill to leave the European Union may break as soon as mid-December. Some markets participants expect the two sides will agree at the next EU summit on December 14 to 15 that significant progress has been made, and a move to the next phase of beginning to discuss trade is round the corner.
In addition to pound-positive news, euro-area inflation data came in lower than expectations, sending the cross to an almost one-month low of 0.8777 on Thursday before paring losses and rising back above 0.8800.
Strong support above 0.8750 and lighter positioning helped the common currency rebound, according to Europe-based traders.
The euro has been consistently trading above 0.8700 versus the pound since June and a meaningful drop below would maybe need more than just progress on a Brexit bill settlement. While the sensitive question of the Irish border still remains unresolved, it is mostly what lies ahead at the next phase of the UK-EU negotiations that should be troubling pound bulls.
The real fight begins when trade talks get in the picture as a tailormade deal for Britain may be very hard to get. In German Chancellor Angela Merkel’s words, the next phase of talks will be “incomparably more difficult.”
Amid a strong euro-area economy and lingering long-term concerns about the Brexit process, option traders look for increasing upside risks in the euro-pound cross, as shown by risk reversals.
Sterling rallies this year have gained traction as some mediumterm stale shorts hit their trailing stop levels and rushed for cover. Short-positioning in the UK currency is bound to be less crowded: the Bloomberg Pound Index’s advance since its August low touched six per cent on Friday.
UK data were soft in November and a turnaround is needed for the pound to be able to buck a trend that sees it weakening versus the common currency as the last month of the year kicks in. Pound bulls should keep in mind that when it comes to Brexit-related gains, it may be a case of easy come, easy go. — Bloomberg