November 18, 2019 / 10:05 AM / 19 days ago

Sterling hits $1.2960 on election optimism; short positions decline

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Elizabeth Howcroft

LONDON, Nov 18 (Reuters) - Sterling rose above $1.2960 on Monday after Prime Minister Boris Johnson said that all Conservative Party candidates in the upcoming election have pledged to back his Brexit deal.

Johnson told the Telegraph newspaper in an interview published on Saturday that all 635 Conservative candidates standing in the UK election would vote in parliament to pass the withdrawal agreement.

“It wasn’t news to me,” said Jordan Rochester, FX strategist at Nomura, noting that Johnson had already rid the party of any Conservatives who didn’t back the deal in the key votes.

The pound was up 0.4% against the dollar at $1.2957 after touching $1.2961 in early London trading, its highest since Nov. 1.. Versus the euro, the pound strengthened around 0.3% to 85.39 pence.

“The truth is, it’s probably a specific flow that’s driving it,” Rochester said, although he added that investor confidence in a Conservative lead was boosting the pound more generally.

The Conservatives lead Labour by 10 to 17 percentage points, four polls late on Saturday showed. A poll published by Good Morning Britain on Monday showed the Conservatives had a 14-point lead.

The Labour party is expected to release its manifesto on Thursday.

“The $1.30 level is quite a strong psychological resistance here,” Nomura’s Rochester said. “For it to really have momentum, you need to see the Labour party’s manifesto not do as well as it did in 2017.”

Weekly futures data showed that positions betting against the pound versus the dollar fell in the week to Nov. 12 to the lowest levels since May. The net short position means that the pound has more potential to appreciate on good news than depreciate on bad news.

In a note to clients, Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, said that focusing on the pound versus the dollar gives a distorted impression of sterling, since even after Brexit the UK’s economic development will remain linked with that of Europe - its closest trading partner - and so sterling and the euro will be correlated.

“That means GBP-USD strength is mainly a reflection of EUR-USD strength. If we want to know how GBP-specific effects work, we have to keep an eye on EUR-GBP,” he wrote. (Reporting by Elizabeth Howcroft; editing by Larry King)

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