- Pound Shakes Off Economic Woes as Traders Set High Bar for Shock
Sterling is becoming immune to bad news.
The currency has rallied more than 2 percent against the dollar in the past two weeks, despite several pieces of disappointing economic data. That included gains on days when reports showed a weak pace of U.K. services growth and falling property prices.
The country’s economic data has been underwhelming for months, according to the Citi Economic Surprise Index, and little progress has been made in Brexit talks with the European Union. Despite this, sterling is up about 6 percent this year and breached $1.30 on Tuesday.
“The starting point for sterling is so low that it may need disastrous news for it to fall significantly lower,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. “The selloff since late October 2015 suggests that it has already priced in worse economic data than we have so far seen.”
As investor attention turns toward the European Central Bank decision on Thursday, dovish comments from Federal Reserve policy makers and a parliamentary vote on Brexit legislation, traders are reconsidering their sterling positions, said Rabobank International’s head of currency strategy Jane Foley.
“The market is very short of sterling, meaning that it’s more likely to move on good news,” said Foley. “The second reading of the EU repeal bill will be watched closely, with sterling likely to push a little higher if there is no rebellion from Tory ‘remainers’.”
U.K. Prime Minister Theresa May faces a challenge in Parliament to the bill to transfer EU law into U.K. legislation from the opposition Labour Party. Labour’s stance has also renewed sentiment among traders on the potential for a more constructive Brexit, according to Canadian Imperial Bank of Commerce strategist Jeremy Stretch.
The options market shows investors have pared bearish bets on the pound in the past two weeks. But the nerves of traders could soon be tested, with time running out for Britain to meet an October deadline to achieve progress in the EU talks and move onto discussing a future trade relationship.
“It’s not a change in story,” Stretch said. “Just another periodic rise that should eventually give way to selling on rallies.”