Traders Less Bearish on Pound for Next Six Months After Ruling

  • Premium for contracts hedging against pound declines falls
  • Brexit timing hangs on Supreme Court hearing due in December

Pound bears are slowly taking a step back.

Options pricing showed the outlook for sterling versus the dollar is less pessimistic since a High Court ruled last week that the U.K. can’t start the process of leaving the European Union without lawmakers’ approval. Speculation the exit will be delayed or watered down helped boost the pound, which completed its best week against the U.S. currency since 2009 on Nov. 4. The timing of Brexit now hinges on a Supreme Court hearing scheduled for Dec. 5-8, to consider the government’s appeal.

The risk-reversals measure covers the period including the potential triggering of Article 50 of the Lisbon Treaty, which Prime Minister Theresa May has said will happen by the end of March.

“Brexit risks are in a holding pattern” until the “U.K. Supreme Court hearing in early December puts them back on the agenda,” said Ned Rumpeltin, the European head of foreign-currency strategy at Toronto Dominion Bank in London. “That has been enough to generate a broad short squeeze on existing positions, something that could extend a bit further.”

The premium for six-month contracts hedging against the pound falling versus the dollar compared with those protecting against it rising was at 1.80 percentage points Tuesday, according to risk-reversals data compiled by Bloomberg. That’s the lowest since Oct. 6, based on closing prices, and down from 2.31 percentage points as recently as Oct. 13.

Sterling was little changed at $1.2414 as of 4:16 p.m. London time. It climbed 2.7 percent last week, its biggest gain since October 2009.

The pound sank to a 31-year low versus the dollar in October as sentiment grew that Britain was heading toward a hard Brexit, where unfettered access to Europe’s single market is sacrificed for immigration controls. The decline was partially reversed on Nov. 3, when a panel of judges ruled that the government needs parliament’s approval to start negotiations to exit the EU.

Data Tuesday showed U.K. manufacturing surged the most in five months in September, adding to evidence of the economy’s resilience since the June 23 Brexit vote. Sterling is still the worst performer among major currencies this year, down almost 16 percent against the dollar.

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