Is there anything more to the rebound in the pound?

Author: Justin Low | Category: News

The pound has rallied by more than 4% against the dollar after falling below the 1.2000 level at the start of last week

The pound has rallied by more than 4% against the dollar after falling below the 1.2000 level at the start of last week
The pound has been remarkably solid in the past two weeks of trading. While there is some reason to be mildly optimistic as parliament succeeded in turning the Brexit delay bill into law, is it really worth 4% (give or take, minus out dollar weakness today) of optimism when put together with other Brexit developments?

As much as I am skeptical about the pound's strength, the overwhelming rally today has got me thinking a little. Is it just all about short covering and positioning flows during the quiet period before October strikes?

My previous take was that the range for cable will settle between 1.20 and 1.25 during this period but as we move closer to the upper extreme, this is something to look at in case we observe a potential breakout.

How does positioning look for the pound?

In recent weeks, we have seen significant short covering in the pound after having seen shorts at their most stretched since early 2017. Although the CFTC data is lagging, it is telling about sentiment in the pound amid hopeful optimism to avoid a no-deal Brexit.

What about economic data?

Citi UK
This is perhaps one of the more convincing arguments but then again, how much does UK data factor in when Brexit is still the main issue? Either way, the data doesn't lie and that is we have seen some significant improvement in UK data - relative to expectations - as of late.

However, even though the Citi economic surprise index ticked back into positive territory this month, I'm still not convinced that this is a valid reason to bolster pound sentiment so heavily towards buyers.

I mean sure, the UK may avoid a technical recession this year but economic growth is still rather flat and with Brexit uncertainty potentially being prolonged, that doesn't bode well for the overall economic outlook going into 2020.

Have Brexit developments changed since parliament is prorogued?

Not really, in my view. We're no closer to a Brexit deal than we are with Theresa May and all the signs are still pointing towards an eventual general election.

Sure, we may see a Brexit extension come about at the end of the day - as the European Union will not cut off their own arm - but all it does is prolong the uncertainty and potentially create an even bigger political mess than the one we're seeing now.

Is that really a good thing in the long run especially when said uncertainty is continuing to strangle the economy?

How does everything look like when put together?

As it stands, this still feels more like a technical rebound (off the 1.2000 handle) as well as continued short covering. But if we start creeping higher beyond 1.2500 and the 100-day moving average, then there actually may be more to it.

In such a scenario, I would argue that markets are underpricing risks of a no-deal Brexit. However, you can't argue with what you see on the charts either can you?

What do you think is going on in the pound? Do you think odds of a no-deal Brexit have receded significantly? Drop a line in the comments below.

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