LONDON (Reuters) - Sterling slipped over 1 percent on Monday against the dollar, which followed U.S. bond yields sharply higher on expectations of a jump in inflation following Donald Trump’s U.S. presidential election victory.
The pound has just recorded its best fortnightly performance on a trade-weighted basis in eight years, with investors’ focus having turned away from Brexit and towards political risks elsewhere.
A slew of perceived risk events in Europe are weighing on the euro, with Trump’s victory seen boosting a global wave of populism and radical political parties. Italy has a referendum on constitutional reform next month, while French, Dutch and German national elections are all due next year.
Sterling fell to as low as $1.2445 on Monday, down 1.2 percent on the day, but still around 2.5 percent up from two weeks ago.
It edged up 0.2 percent against the euro to around 86 pence, close to a seven-week high of 85.67 pence struck on Friday.
“If you look at euro/sterling, it’s pretty much at the lows (for the euro). This is a dollar story,” said BNP Paribas’ global head of currency strategy, Steven Saywell.
“What do you sell against your rebounding dollar? A lot of the answer lies in positioning. The market went into (the U.S. election) super-long of yen and super-short of sterling. What that tells me if I want to buy the dollar I want to sell the yen and the last thing I want to sell is sterling, because the market is already super-short.”
Data from the Commodity Futures Trading Commission released on Friday showed speculators cut their bets on pound weakness for a fifth straight week, after short positions hit a record high.
A Trump presidency was seen by investors as potentially strengthening Britain’s hand in negotiations with EU leaders as it leaves the European Union, a view strategists said had helped send the pound to a five-week high of $1.2673 last week.
The billionaire businessman’s victory in last Tuesday’s election has also sent the dollar to its highest in 11 months as U.S. bond yields have risen, with expectations that he will boost spending and put restrictions on trade seen potentially putting an end to the low inflation of the past decade.
“The market is taking the initial view that a president Trump will be favourable for the dollar in the year ahead,” said MUFG currency economist Lee Hardman.
“The market is placing greater focus on the more positive aspects of his plans, with the loosening of fiscal policy seen supporting growth and enabling the Fed to tighten monetary policy more than the market was anticipating.”
editing by John Stonestreet