The British pound went up by more than 1 percent against the euro, due to a combined factor of solid data and greater political certainty over the Brexit process which has bolstered a trimming of big financial bets against the pound.
Dealers pointed out that the promise of Trade Minister Liam Fox of Britain hoping to adopt the European Union’s free trade agreements (FTA) with about 40 countries after it leaves instead of negotiating new deals as a positive for the pound.
The boost the pound experienced is thanks mostly to the recovery of the dollar against the euro after falling multiple times prior dealers and strategists said.
However, they also said that there were more signs that large asset and pension managers – “real money” in the market parlance- who has bet big against the pound last summer were collecting more of those gains.
Vasileios Gkionakis, global head of FX strategy at UniCredt said that “60-70 percent of the recent rise in sterling is dollar weakness and the rest is people paring back the extreme shorts that they had in place.”
The British pound traded 0.9 percent higher at 85.07 pence earlier going below 85 pence per euro for a short period of time in afternoon trading in London. It was also up 0.5 percent at $1.2638.
On the futures market, net bets against the pound were only two thirds of what they were last October as shown by U.S. industry data. However, most major banks still predict it will fall some more.
Against that are increasing expectations of a higher global inflation and the boost that firms are starting to report to UK prices from almost one fifth fall in the pounds value versus the dollar since the latter part of 2015.
In the lack of more impact from Brexit on other parts of economic growth, ahead of the inflation report of the Bank of England on Thursday, that has markets preemptively pricing in a 40 percent chance of higher official interest rates this year.
Gkionakis said “I think you would need something decisively hawkish from (Bank of England Governor Mark) Carney to break the $1.27 level.”