LONDON: Sterling gained as some risk appetite returned to financial markets on Thursday, but it remains near 2017 lows and markets expect the currency will weaken further.
Risk sentiment stabilised after China reported that exports rose in July, bolstering demand for the pound. Sterling rose 0.3% to $1.2777, although that left it close to the 31-month low of $1.2080 it reached early this month.
Against the euro, sterling was up 0.2% to 92.10 pence , close to this week's two-year low of 92.49.
The gains are not considered a fundamental shift, analysts say.
"I don't think it's a game changer," Jordan Rochester, forex strategist at Nomura, said.
The pound dropped as expectations grew of a no-deal Brexit after arch-Brexiteer Boris Johnson became prime minister late last month, pushing the currency to its lowest in two years.
Johnson said he would take Britain out of the European Union on Oct. 31 even if that means leaving without a transition agreement. He demanded the EU show before new talks begin it was willing to change the deal it had agreed with his predecessor. The EU has repeatedly said it will not reopen the negotiations.
Foreign exchange strategists polled by Reuters predict that the pound will trade between $1.17 and $1.20 as the Oct. 31 deadline approaches.
Investors have also been buying options to protect against unexpected swings in sterling, sending the cost of three-month options to its highest since January. Three-month risks reversals, which include the October deadline, imply that investors expect the pound will fall rather than rise .
According to the Commodity Futures Trading Commission data, leveraged funds added more net short sterling positions in the week to July 30, taking the value of contracts to $6.85 billion, its highest since May 2017.
The median forecast for a Brexit with no deal agreed jumped in an Aug. 2-7 Reuters poll of economists to 35%. That was up from 30% in July and the highest since Reuters began asking the question two years ago. Betting markets also forecast a higher chance of a no-deal Brexit.
Not everyone is ready for Brexit with no deal. Two-thirds of exporters have yet to take basic steps. Of an estimated 240,000 companies that trade solely with the EU, less than a third have successfully registered for an identification number needed in the event of a no-deal, British media reported.
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