Pound Positions May Pick Up This Week on Brexit ‘Positive Vibes’

  • Political headlines, production data to give direction
  • Market wants clarity on Brexit transition period: Rabobank

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After a quiet start to January, this week could see bigger bets come back into play on the pound.

With the U.K. Parliament returning from recess and a slew of data, investors will be looking to put on fresh sterling positions, according to Neil Jones, head of currency sales at Mizuho Bank Ltd. Despite lingering Brexit uncertainty and a mixed economic picture, banks including Nomura International Plc and ING Groep NV have bullish calls on cable.

“They will probably try buying the pound initially and take it higher,” said Jones. “My sense is there’s an expectation for a weaker dollar and probably some initial positive vibes on Brexit.”

A breakthrough in Brexit talks in December helped the pound to end 2017 up almost 10 percent versus the greenback, and the consensus in a Bloomberg survey sees the dollar index continuing to weaken in 2018. Still, as the market faces a crucial 10 months of Brexit talks before an October target to reach a trade agreement with the EU, domestic factors will also be key.

On the data front, manufacturing and industrial production growth are expected to slow year-on-year, which could weigh on the currency.

Brexit Hurdles

As U.K. lawmakers return after a December recess, the market will also be awaiting government comments on Brexit, with the first hurdle to agree a transition period by the time of an EU summit in March this year.

“Although talks regarding the U.K.’s future relationship with the EU are likely to be the single biggest driver for the pound this year, firstly the market will want to see clarity and confirmation regarding the transition period,” said Jane Foley, head of currency strategy at Rabobank.

Investors seem confident on progress by March, with three-month implied volatility on sterling at the lowest since December 2014 even as it takes in the EU summit. The next couple of months are likely to be “the calm before the storm,” according to Ulrich Leuchtmann, Commerzbank AG’s head of currency strategy.

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