September 30, 2019 / 11:38 AM / 22 days ago

Pound ekes out slender gains against weak euro

LONDON (Reuters) - Sterling edged up on Monday, benefiting in particular from the euro’s weakness and shrugging off data pointing to a contraction in the UK economy as investor attention remained focused on Brexit news flow.

FILE PHOTO: A shop assistant counts piles of British Pound Sterling banknotes at an Apple store in London, Britain November 18, 2017. REUTERS/Russell Boyce

The British currency rose as much as 0.8% against the euro as the single currency tumbled after Reuters reported that Germany’s leading economic institutes had made downward revisions to growth forecasts for Europe’s biggest economy.

It also rose half a percentage point to the dollar at one point before easing back. By 1500 GMT it was up 0.1% at $1.2302, having fallen 1.6% last week. Against the euro, it was up 0.4% at 88.67 pence, having climbed all the way to 88.31 pence.

Kenneth Broux, FX strategist at Societe Generale, attributed the volatility partly to position-squaring before the new month.

“This is the first rise for sterling in four days (versus the dollar) but I am concerned that we will see the selling resume ... Technically it looks very short-term,” Broux said.

Pressured by Prime Minister Boris Johnson’s apparent determination to take Britain out of the European Union on Oct. 31 even without an exit agreement, the pound was also hit on Friday by comments from a Bank of England policymaker who said Brexit uncertainty could warrant looser monetary policy.

The impact of that uncertainty became evident in data showing the economy contracted at a 0.2% quarterly rate, but grew by 1.3% in the year to June 30. That was higher than estimates for 1.2%, implying continued support from household spending.

The pound did not react to the data, given that there have been few signs of progress in breaking the Brexit deadlock with the European Union.

Johnson has not said how he could push through a no-deal Brexit without contravening a parliamentary law requiring him to seek an extension if an agreement is not reached by Oct. 19. He is also under pressure over allegations that he groped two women 20 years ago. He has denied any wrongdoing.

The government’s unchanged stance on an Oct. 31 Brexit has reduced some of the optimism that boosted markets immediately after last Tuesday’s Supreme Court ruling that Johnson had acted unlawfully in suspending parliament. The currency looks set to end the month with a 1% gain versus the dollar.

“We had a little rally first two weeks of September, it unravelled after the court ruling and now we are going into October which is going to be chaotic for the pound in the lead-up to the EU summit (of Oct 17-18),” Broux added.

Renewed Brexit uncertainty is reflected in options markets where one-month implied volatility has risen to around 11.5 vols from less than 11 vols last week.

For a graphic on Sterling positioning:

here

Despite the gloom, speculators trimmed net sterling short positions in the latest week, data from the U.S. Commodity Futures Trading Commission showed.

For a graphic on Sterling implied volatility:

here

Reporting by Sujata Rao in London; Editing by David Goodman and Matthew Lewis

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