Sterling surges on data boost, more Brexit hope

Sterling soared by more than 1 percent against the euro on Wednesday, driven by a combination of solid data and greater political certainty over the Brexit process which has encouraged a trimming of big financial bets against the pound. Dealers cited Trade Minister Liam Fox's promise that Britain hoped to adopt the European Union's free trade agreements (FTA) with around 40 countries after it leaves the bloc rather than negotiate new deals as a positive for the pound.
A Guardian story also outlined a Brussels report that said EU negotiators must strike a "workable" deal with Theresa May's government to protect the City of London or the economies of the remaining member states will be damaged.
Dealers and strategists said a recovery for the dollar against the euro after dramatic falls on Tuesday had played a role in boosting sterling.
But they also said there were more signs that large asset and pension managers - "real money" in market parlance - who bet heavily against the pound last summer were cashing in more of those gains.
"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," said Vasileios Gkionakis, global head of FX strategy at UniCredit. Having broken below 85 pence per euro briefly in afternoon trading in London, sterling traded 0.9 percent higher on the day at 85.07 pence by 1647 GMT. It was also half a percent stronger at $1.2638.
US industry data shows net bets against sterling on the futures market were only two thirds of what they were last October as of a week ago, but they remain elevated and many major banks are still predicting it will fall further.
Against that are the growing expectations of higher inflation globally, and the boost that firms are starting to report to UK prices from the almost one fifth fall in the pound's value against the dollar since late 2015.
In the absence of more impact from the Brexit process on other measures of economic growth, ahead of Thursday's Bank of England inflation report, that has markets already pricing in a 40 percent chance of higher official interest rates this year.
"I think you would need something decisively hawkish from (Bank of England Governor Mark) Carney to break the $1.27 level," said Gkionakis. Members of parliament conclude a two-day debate on Brexit with a vote at 1900 GMT that so far looks set to proceed with the government's plan to launch talks on leaving the European Union by the end of March.
Lawmakers have submitted 60 pages of proposed changes to the legislation published last week but so far there has been no sign of a rebellion by ruling Conservative party members that would allow anything substantive to pass.
Another solid survey of manufacturing purchasing managers also ran against some tentative signs this week that the economy may finally be slowing down in response to the risks brought by the talks.
"Although we retain a near-term bias for further sterling weakness, we think the medium-term fundamentals look more positive," analysts from Bank of America Merrill Lynch said in a trading note on the pound. "Our Q1/Q2 forecast for GBP/USD remains $1.15, although we concede that this target is being challenged. The pound looks cheap versus macro drivers such as the labour & property market and against the backdrop of improving global growth."