Back to Brexit for sterling

LONDON: It has been a difficult week for investors betting against sterling on worries about the shape of Britain’s exit from the European Union. And next week’s Supreme Court hearing on parliament’s role in proceedings may only make things worse.

In the space of a few hours on Thursday, the pound surged to its highest in almost three months against the euro and its highest in two against the dollar.

Brexit Minister David Davis was the trigger, hinting for the first time that the government could contribute to the EU budget in exchange for retaining more privileges in the bloc’s single market.

That was not a commitment to stay inside the single market, but it sounded like the sort of concession that might lead London to a compromise less damaging to its banks, businesses and economy than some investors had feared.

It followed a month when domestic politics and economics have played steadily in favour of the pound, and the focus on events in the United States and on global fixed income markets has turned speculators’ eyes elsewhere.

Sterling’s value against a basket of currencies rose 5% in November, its biggest monthly rise since January 2009 and second biggest in more than three decades. It remains 15% down since this time last year.

The government also suffered defeat in a contest for a vacant parliamentary seat on Thursday which felt like an anti-Brexit vote. And the court case will allow its opponents to make the case again for their right to influence perceived hardliners like Davis.

With short positioning in sterling still close to record lows and the proximity of year-end accounting, some of those who bet in July and August on depreciation seem to have cashed in and walked away.

“For the first time in weeks, domestic issues are driving sterling,” said Jordan Rochester, G10 currency strategist at Nomura in London. “I expect a lot of noise, and because market positioning is still very short, the risks are always for a potential squeeze to the upside.” – Reuters