Pound Bulls Emboldened by Election Look Ahead to Key Milestone

  • Sterling stays above $1.28 as weekly technicals point higher
  • Bearish sentiment in options has eased since mid-January

Why the U.K. is Heading to the Polls… Again

The case for the pound to climb above the psychologically important level of $1.30 is strengthening, as technical indicators point toward an extension of its post-election announcement rally and bearish options bets lose traction.

Sterling’s move above $1.28 after Prime Minister Theresa May announced snap elections last week has proved more than a knee-jerk reaction, with the close last Friday above July’s low turning technicals bullish on the weekly charts. That hints at further gains for a currency that has struggled to mount a sustained recovery since its record tumble following the U.K.’s decision to exit the European Union last year. The pound hasn’t traded above $1.30 since Sept. 30.

The July low of $1.2798 defined the bottom for three months after the EU referendum, and it was only the pound’s flash crash in October that saw the support give way. Friday’s close above that level forced the Bloomberg Trender Indicator to turn bullish on weekly charts for the first time since September 2015. Should cable manage to break resistance at its 55-weekly moving average of $1.2990, it could squeeze shorts further as market participants haven’t completely unwound their short-pound positions, according to traders in Europe who asked not to be identified as they weren’t authorized to speak publicly.

While there was demand for pound upside last week through call spreads at over-the-counter trades, the lower band of the strikes lies near $1.3300, according to the traders. A lack of exposure below those levels may prompt traders to chase the market higher. On top of that, according to data from the Depository Trust & Clearing Corporation, expiries over the next month are concentrated within $1.25 to $1.30.

The pound was at $1.2819 as of 9:06 a.m. in London on Wednesday, having rallied about 2 percent since May called the elections on April 18. Still, it remains about 14 percent weaker since the Brexit vote, and fell to $1.1841 in October, according to data compiled by Bloomberg, the lowest since 1985.

Even as U.K. data seems to be taking a turn for the worse, and as uncertainty over the nature of the nation’s exit from the EU endures, bearish bets in cable have waned steadily since mid-January. Risk reversals on the one-month tenor, a gauge of market sentiment and positioning, show demand for pound weakness has eased since it hit a near-three-month high in January.

That trend has continued since May called early U.K. elections, a decision which long-standing pound bear Deutsche Bank AG called a “game changer” for the currency.

NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

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