Sterling surged more than a cent against the dollar on Monday and to its highest since early September versus the euro as the market processed Prime Minister Theresa May's latest hints on the possible shape of Britain's exit from the European Union. Speaking to business leaders on Monday, May pledged to address concerns that Britain could fall off a "cliff edge" into uncertain trading conditions when it leaves the bloc.
That had little immediate impact on sterling until the arrival of US investors around lunchtime in London, at which point the currency surged by a full cent in less than a minute. "It is hard to attach it to hard newsflow but it does seem that the reading of this morning's events may have been different for investors in different time zones," said Sam Lynton-Brown, a strategist with BNP Paribas in London.
"What is clear to us is sterling is really cheap, and whenever the pricing of a clean and hard Brexit is threatened it will tend to strengthen." By 1630 GMT, the pound was up 0.9 percent on the day at $1.2457, having topped out at $1.2513. It gained 0.6 percent against the euro to 85.13, having briefly traded below 85 pence for the first time in nine weeks. Sterling marked its third consecutive week of gains against the euro on Friday.
The steadier tone has come as a number of banks begin to argue that a 20 percent fall since last December may prove enough to balance out Britain's large current account deficit and much of the risk stemming from June's Brexit vote. Many banks, including HSBC, Goldman Sachs and Morgan Stanley among others, continue to call for falls below $1.20 in the months ahead.
This week's big set-piece is the British government's autumn budget statement on Wednesday and there are varying views on the likely outcome for markets and the pound. Barclays strategist Hamish Pepper argued that still extremely extended positioning against sterling suggested the risks from the budget statement were weighted in its favour.
"The risk for us is that the government are able to forecast a continued narrowing of the (budget) deficit," he said. "The consensus forecast is for a very modest recovery. If you get something a bit more aggressive than that, then it may give sterling a boost." But Chancellor Philip Hammond on Sunday played down the chances of a major new boost for spending from Wednesday's statement, his first as finance minister since the rejigging of the Conservative government after June's referendum.
Hammond said in a BBC interview he wanted to keep some fiscal "headroom" as two years of difficult negotiations about leaving the EU approach. Analysts expect some modest infrastructure spending and housing stimulus from Wednesday's statement but nothing that would radically change expectations of a weaker economy next year when difficult talks begin on the terms of Brexit.
"Public finances are not in good shape and Mr Hammond has no appetite for a major increase in borrowing," said Societe Generale strategist Kit Juckes. "That, along with (German finance minister) Wolfgang Schaeuble's hard line on Brexit negotiations, won't help the pound, which has seen some reduction in short positions according to last week's CFTC data. A brief sortie by the euro back up to 0.88 is possible."
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