Hedge funds stepped up their negative bets on sterling as U.S. President Donald Trump backed hardline British politicians Boris Johnson and Nigel Farage ahead of Britain’s planned withdrawal from the European Union.
The current British premier Theresa May has announced she is quitting, triggering a contest that will bring a new leader to power, with most of the frontrunners expected to push for a decisive break with the European Union.
While sterling edged further off five-month lows on Monday, rising 0.15% to $1.2645, short positions are slowly building up in the background, reflecting growing uncertainty among investors on the outlook for the British economy.
Short positions are at their highest level since March 17.
“We now have 13 Tory politicians standing for leadership, and Boris Johnson in particular is attempting to hammer in his popularity; aided a little by Donald Trump who is talking up Farage and Johnson,” said Rabobank FX strategist Jane Foley.
Trump arrived in Britain on Monday for a state visit, with his interventions on Brexit, May’s successor and a row over China’s Huawei set to overshadow the pomp and a banquet with Queen Elizabeth.
Potentially adding to this bearish sentiment on the British currency, a survey showed on Monday that Brexit stockpiling boom of early 2019 gave way last month to the steepest downturn in British manufacturing in almost three years as new orders dried up, boding poorly for economic growth in the second quarter.
But with political headlines dominating proceedings, this had little immediate impact on sterling, which remained higher on the day after the release of the data.