Currency speculators have cut back their bets against sterling as a growing list of economic reports showed the British economy weathered the aftermath of June’s vote to leave the European Union without a major shock.
Sterling has started to climb back from its initial Brexit-led plunge of more than 10 per cent as data from business surveys, retail sales, exports, construction, house prices and auto demand all showed remarkable stability through July and August. Against the euro, sterling has now risen to 83.75p, having been about 87p after the Brexit vote.
Sterling’s recovery to a near-two month high against the dollar – and its steady gains against the euro – were cemented by figures on Monday that showed Britain’s all-important services sector in August staged its biggest recovery in the survey’s 20-year record, expanding far faster than economists had expected.
As the economy’s resilience to Brexit confounds economists – and undermines the Bank of England’s worst fears – it has also unnerved currency speculators who had built up their biggest bets ever on the pound falling further.
Last week saw the first reduction for nine weeks in these net short positions on the Chicago Mercantile Exchange, according to Commodity Futures Trading Commission data.
Small shift
It was a relatively small shift, to a net short position of 92,486 contracts worth just under $8 billion from a record 94,978 contracts the week before.
But previous episodes of extreme bets against sterling over the past 20 years suggest the currency’s recovery has further to run and that these short positions are vulnerable to a potentially substantial unwinding.
“Expectations of a UK recession are receding and there are question marks over whether the BOE was too aggressive in easing,” said Manuel Oliveri, an FX strategist at Credit Agricole.
“What we are telling clients is there is still a risk of position squaring and sterling can run up to $1.35-$1.36,” he said.
Sterling rose to $1.3375 on Monday, its highest since July 15th. That was up more than 4 per cent from the 31-year low just under $1.28 it struck in the days just after Britain voted to leave the European Union.
Britain’s services sector, which accounts for more than 70 per cent of UK economic output, expanded last month at such a pace to cast serious doubt on the view that the country would slip into recession this year.
Markit’s services purchasing managers index (PMI) jumped to 52.9 in August from 47.4 in July. A reading above 50 denotes expansion, and below 50 contraction.
Policy easing
Echoing Markit’s analysis of the data, JP Morgan’s UK economists said the risk of imminent recession has receded. They maintained their call for further policy easing from the BoE this year but raised their 2016 growth forecast to 1.9 per cent from 1.7 per cent and next year’s forecast to 0.9 per cent from 0.6 per cent.
Bank of England governor Mark Carney faces a severe test on Wednesday when he explains the Bank’s recent actions, thinking and outlook to British lawmakers.
Some on the treasury select committee are highly critical of the Bank’s perceived role in “Project Fear” surrounding the economic consequences of Brexit, and its decision last month to cut interest rates to a record low 0.25 per cent and revive its bond-buying “quantitative easing” stimulus programme.
He might point out that Brexit itself has not yet occurred. Prime minister Theresa May says the process of disengaging from the EU won’t begin until next year. It will take up to two years to complete.
“We have not changed our expectation that the BoE will cut rates further in November. However, there is more uncertainty around that view now,” said Alan Monks, UK economist at JP Morgan.
– (Reuters)
