Sterling bolstered by better risk sentiment across markets

Sterling held above $1.22 on Monday, bolstered by better risk sentiment across global markets. However, expectations that Britain’s economy would suffer due to the country’s exit from the EU was limiting gains.

Against the euro sterling was trading late on Monday at just over 89.2p, having been below 89p earlier. The euro remained generally weak amid speculation that the ECB would extend its bond-buying programme beyond next March.

In the past few weeks, when politics took the front seat, concerns about a “hard” Brexit by Britain and a hardline stance by the EU in the negotiations that are likely to start next year saw sterling take a battering and fall to a record low on trade-weighted terms. This week the focus will be on the third-quarter growth readings for the economy due to be released on Thursday.

Aftermath

After a strong second-quarter, Britain’s economy is expected to slow and is forecast to grow at 0.3 per cent in the third quarter. Thursday’s report will be the first reading of how the broad economy has performed in the immediate aftermath of the shock vote to leave the EU in June. So far all the evidence has suggested that the economy has held up well and the country is likely to dodge a recession.

Sterling was flat at $1.2233, drawing strength from higher stock markets. The pound often tends to move in sync with riskier assets given Britain’s large current account deficit. Given the dour outlook for sterling, speculators have been building bets against the pound in the past few weeks.

Very short

“Positioning in sterling remains very short and that could discourage further aggressive selling especially if UK data remains fairly resilient,” Credit Agricole analysts said in a note.

The currency has shed nearly 18 per cent against the dollar since the June vote, with losses accelerating in October after British prime minister Theresa May raised the spectre of a “hard” Brexit.

Under a "hard" Brexit the UK government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing the foreign investment needed to fund Britain's huge current account deficit.– Reuters