The pound edged lower on Thursday after this week’s run as investors booked profits and assessed the continued uncertainty about when Britain will exit the European Union and on what terms.
Sterling has surged to multi-month highs this week after Prime Minister Theresa May said lawmakers would get the chance to vote on a delay to Brexit if they choose not to back her Brexit withdrawal agreement.
That has encouraged traders to slash their forecasts for a no-deal Brexit and instead expect a delay beyond the official March 29 departure date.
The opposition Labour party said this week it would support a new referendum on Brexit after parliament defeated its alternative plan for leaving the EU.
Many banks have lowered their forecasts for a no-deal Brexit this week but there remains a high degree of uncertainty, with options ranging from May’s deal being passed, a delay to Brexit or even a second referendum.
U.S. bank JP Morgan said on Thursday its best guess was for Britain to exit the EU on the terms of the current divorce deal, an outcome to which it assigned a 45 percent probability.
Sterling touched its highest since September, $1.3351 versus the dollar, on Wednesday and a 21-month high of 85.295 pence per euro. It is up more than 4 percent against both currencies so far in 2019.
On Thursday, the British currency slipped 0.2 percent to $1.3286 by 1535 GMT. The losses were of a similar magnitude versus the euro, with sterling 0.2 percent lower at 85.595 pence.
“While we don’t want to stand in front of any GBP rally, we recognise that the move is already meaningful and for EUR/GBP to break below 0.8500 level we need more catalysts,” ING analysts said in a note.
Investors have rushed to adjust their positions as the risks of a no-deal Brexit look less worrying, pushing sterling higher.
Some investors, however, warn against getting carried away given that uncertainty remains high.
UBS wealth management said they “caution against chasing the rally, as downside risks for the British pound remain in place.
“In our view, the risk-reward trade-off to buying sterling only becomes attractive at GBPUSD levels of $1.24 and below and EURGBP levels 0.92 and above,” they wrote in a note to clients.
