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Pound makes unexpected post-Brexit comeback

The pound’s resilience following buoyant post-Brexit economic data is encouraging some sterling pessimists to rethink their short-term strategies.

Deutsche Bank AG has exited a bet for sterling to fall on a trade-weighted basis, while retaining its longer-term negative view on the U.K. currency. UniCredit SpA said it had closed a short pound-dollar position, or a wager sterling would weaken, to reduce “tactical” risk.

The pound rose for a fifth day against the greenback, its longest winning streak since March. Reports such as an index of August services, which jumped the most on record when it was published on Monday, give a more positive view of the U.K. economy in the wake of the June 23 vote to leave the European Union than many had predicted. To analysts, this reduces the need for the Bank of England to further expand its rebooted bond-buying program or to cut interest rates when it announces policy on Sept. 15.

Recent data suggest the near-term confidence impact of Brexit may have been overstated, and with risks the BOE now sound a more sanguine note, we take profit on our May” recommendation to bet against the pound on a trade-weighted basis, London-based Deutsche Bank strategist Oliver Harvey said in a note. “This doesn’t change our medium-term bearish outlook, however.”

Winning Run

The pound rose 0.3 per cent to $ 1.3337 (U.S.) as of 10:13 a.m. in London, leaving it 2 per cent higher in the past week. It gained 0.1 per cent to 83.70 pence per euro, climbing for a sixth straight day. Deutsche Bank’s index of sterling versus the currencies of Britain’s biggest trading partners climbed to the highest since July 21 on a closing-price basis.

Both Deutsche Bank and UniCredit cited risks surrounding Britain’s negotiations for exiting the world’s largest single market when explaining their pessimistic longer-term outlooks.

While the pound’s 10 per cent drop versus the U.S. dollar since the EU referendum is still the worst performance among major currencies, hedge funds and other large speculators last week cut their bearish sterling bets for the first time since early July, reducing them from a record, according to the Commodity Futures Trading Commission in Washington.

“It is still early days, but if the slowdown in the U.K. economy takes longer to materialize than we had expected, this implies upside risks for our forecast” for the pound to weaken, Vasileios Gkionakis, head of foreign-exchange strategy at UniCredit in London, wrote in a note.

The biggest Italian bank sees sterling falling to $ 1.20 by year-end, compared with a $ 1.27 median estimate in a Bloomberg survey.


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