End to UK risks could halt record euro rally

The euro’s remarkable rally versus the pound may be nearing its end as the UK political turbulence seems mostly accounted for, while headwinds persist for the common currency.

Sterling has this month set a record-long losing streak versus the euro as the market priced in the prospect of British Prime Minister Theresa May quitting ahead of her resignation announcement yesterday, and the risk that her successor could favour a no-deal Brexit. Until there is more clarity on that front, investors may refrain from adding euro-pound long positions, especially with the latest Euro-area data denting hopes of an economic rebound.

The euro rose for a 14th session versus the UK currency on Thursday, boosted by gains versus the greenback after weak US data. The Euro-area economic picture isn’t any rosier: private-sector output remained subdued in May amid stagnant demand, while German business confidence was the weakest in more than four years.

Uncertainty

Sterling is dominated by political uncertainty and is headed for a third week of losses versus the single currency. Short-term positioning has reflected a bearish outlook, with almost all market participants selling the pound in recent sessions. Real-money names have been more active than usual, as leveraged and macro accounts added shorts, according to traders in London and Europe, who asked not to be identified because they are not authorised to speak publicly.

As positioning in the cash market becomes overstretched, charts call for a technical correction given momentum indicators have risen to levels unseen in almost two years.