Sterling fell below $1.26 on Thursday for the first time since a January 3 flash crash, extending recent losses made on the back of signs that whoever succeeds Prime Minister Theresa May is likely to be a hard Brexit proponent.
The pound, which had been broadly steady for most of the European session, dropped under that level as the dollar firmed to a one-week high and a large batch of options with a $1.2600 strike price rolled off at the New York markets open.
The currency fell 0.3% on the day against a firmer dollar but also lost 0.2% versus the euro.
“The move in the dollar preceded the move in sterling, so it may not be specific to sterling. That said, there was Corbyn’s comments about the referendum which maybe got the market excited,” said BNY Mellon strategist Neil Mellor, referring to Labour leader Jeremy Corbyn saying there needed to be a procedure to block no-deal Brexit.
“I think it’s just an uncertain environment for sterling and uncertainty is never good for a currency,” Mellor added.
The ruling Conservatives suffered a drubbing at last week’s EU parliamentary elections at the hands of the Brexit party, pushing candidates for party leaderships further towards favouring exit from the European Union by the Oct. 31 deadline, with or without a deal in place.
While nearly a dozen candidates are vying for the top job, Boris Johnson, the bookmakers’ favourite, has said Britain should leave the EU on Oct. 31, even without an agreement.
“The risk of a no-deal and no Brexit have both increased and that’s why volatility remains low,” said Colin Asher, a senior economist at Mizuho.
On a monthly basis, the pound was on track for its biggest monthly drop since June 2018, according to Refinitiv data.
Gauges of expected swings in the pound over the coming months remained firm with six-month implied volatility rising to its highest levels since April 2019.
Also abetting sterling’s drop has been positioning in the pound which has been whittled down to broadly neutral levels leaving only retail speculators largely long on the British currency, according to Citi positioning data.
Such long positions could be vulnerable for unwinding if the pound’s weakness accelerates.
Source: Reuters
