Sterling may have peaked even if Brexit deal is done
The pound’s best days may be behind it, even if the UK and EU sign a trade deal.
Sterling was trading at 90p against the euro and rose as much as 1% to $1.35 against the dollar, touching its strongest level since December 2019.
Yet the relative cost of hedging against a weaker sterling through year-end is the highest since April, according to a gauge of positioning and sentiment.
And over the past month, hedgefunds and other leveraged funds have increased short bets against the currency.
Although some investors are still holding out for a payday when a trade agreement is signed, others are looking further out and say the UK’s economic outlook seems grim.
For TD Securities, the damage the coronavirus continues to inflict on the country’s domestic output — which is more vulnerable now that the transition period from the EU is almost over — is hurting the pound’s prospects.
“The optimism around Brexit itself is fully priced in and a little too optimistic relative to where we go in the next couple of weeks,” said Mark McCormick, the global head of foreign-currency strategy at TD Securities.
The investment bank’s 2021 outlook recommends selling the pound if an accord is signed.
Sterling had its best November since 2006, buoyed by the dollar’s drop and encouraging rhetoric from the EU and the UK on the possibility of a trade agreement. The advance came even as the UK suffered one of the biggest economic slumps among developed nations in 2020.
Paul Meggyesi of JPMorgan said a trade deal could deliver a short-lived rally for sterling.
-Bloomberg