An outbreak of bullish sentiment in the UK is mostly limited to sterling.
An outbreak of bullish sentiment in the UK is mostly limited to sterling as worrying signals from U.S. Treasurys keep global shares under pressure.
British shares, at least the top tier of the market, are orientated more to hints of recession from U.S. market yields as well. At the same time, the pace at which sterling regains tone is also keeping blue-chip buyers away.
Having maintained a firm bid from early in the European session, sterling buyers showed little inclination to ease up by the half way point, though caution was returning a short while ago.
The pound’s bounce—by as much as 128 pips against the dollar and 60 versus the euro—from close to 17-month lows hit on Tuesday owes almost all momentum to a reinterpretation of parliamentary events from a realpolitik perspective. The market is now downplaying dark implications from a potential constitutional crisis.
Instead, focus is increasingly on the possibility that an historic government contempt ruling, and a dizzying host of further developments could prevent Brexit happening at all.
True, the validity of mapping odds that Britain may not leave the EU, is as questionable as it would be for any uncertain event. JPMorgan now says chances have risen to 40% from 20%.
Well, it’s less arguable that the odds have shortened, at least. Sterling remains deeply entrenched in ranges established a fortnight ago. But its biggest daily rise since 28th November points to increasing confidence in recent floors, even before highly likely tumult next week.
Still, as we head towards one of the most momentous weeks in UK politics for decades, it is worth maintaining perspective. Note sterling has nowhere near made it to the top its roughly two-week range in the high $1.28s. Nor has it even matched Tuesday highs around $1.2840. Those were just short of corroborated resistance at $1.2850, near hourly peaks on 28th and 29th November.
The shortfall reveals that enough healthy scepticism remains in the market. That underlying sentiment is backed by high demand for options covering the next trading week.
Implied volatility – how wildly sterling could gyrate – has shot back to fresh 18-month highs for spot-week trades. In other words, as the real endgame looms, speculators continue to position for some of the biggest sterling surges of the year. Investors, who tend to use options to protect cash, aren’t taking any chances either.
The pound could have further buoyant episodes before Tuesday, but the market hasn’t felt the last sharp whipsaw just yet.
Source: Refinitiv/City Index
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