Strength Against the Dollar Isn’t Enough for the PoundBy
Sterling reaches its highest level since June 24, 2016
Dollar recovery risks weighing on cable, Santander says
The pound touched a new post-Brexit vote high against the dollar on Friday and investors are clamoring to go long, but analysts urge caution.
While on the face of it the U.K. currency has seen a recovery, in reality it is more about the greenback, according to Societe Generale SA strategist Kit Juckes. In sync with sterling’s strength, the global reserve currency has fallen more than 2 percent since the start of January.
“I look at the trade-weighted chart and the pound really hasn’t moved up from the bottom of the long-term range. It’s still very weak,” said Juckes. “What the euro does is far more important for the trade-weighted value of sterling than what the dollar does.”
Recent U.K. data have been mixed, with retail-sales numbers Friday missing estimates, while positive news on the Brexit talks has yet to translate into actual progress. This means that if the dollar recovers, sterling could find its advance evaporating.
“I see a massive risk of that,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. “The U.S. economy is strong, rates are about to be hiked with more to come and the long euro-dollar trade is full.”
The change in sterling’s fortunes has analysts looking at key technical levels for clues to the pound’s fate. The British currency reached $1.3945 on Friday, its highest level since June 24, 2016, the day after Britain’s European Union referendum. The level of $1.3850 is key for this week and finishing below that could embolden investors to go short, said Juckes.
Still, investors are upbeat on the U.K. currency. Traders are positioning for further gains with demand for calls betting on a rise in sterling overtaking that for puts for the first time since 2009, options markets show.
The extent of the long position the market has built up means sterling would “probably need some worrying political headlines for it to plummet,” said Bennett.
Also, the resilience of the pound versus the strong euro, emboldened by sustained growth and fading political risks, is a sign the British currency is “less sensitive to concerns on the political front, at least for now, ” said Jane Foley, head of Group-of-10 currency strategy at Rabobank.
— With assistance by Sid Verma