(Bloomberg) -- The pound swung as traders attempted to read the tea leaves on the likelihood of the U.K. securing a Brexit deal as soon as this week.
Sterling pared declines after falling 1.2%, as U.K. Prime Minister Boris Johnson pledged to “get Brexit done” despite skepticism from the European Union. Hedge funds and asset managers have been paring their bets on a weaker pound, according to the Commodity Futures Trading Commission.
Traders are repositioning for what could be a swift and brutal move in the currency when the outcome of this week’s negotiations becomes clearer. The clock is ticking down to Thursday’s crunch summit of EU leaders, where Johnson could secure a deal before presenting it to the U.K. Parliament on Saturday, or hurtle faster toward a chaotic exit on Oct. 31.
“What’s really important here is that you have engagement,” said Deutsche Bank (DE:DBKGn) AG’s global head of currency research George Saravelos, who sees the Brexit talks as a potential game-changer for markets. “There’s a notable shift away from this hard Brexit strategy,” he said in a Bloomberg Television interview.
Markets are still relatively optimistic about a Brexit deal, with the pound holding most of its gains after jumping the most in two years last week. The recent rally could have much further to run if a Brexit deal is secured but the pound has far to fall without one, according to Mizuho Bank Ltd. Gains could extend more than 3% to $1.30 if a divorce agreement emerges. If Johnson’s plan fails it could slump almost 3% to $1.22.
The pound has seen big moves in recent days, with the spread between the highs and lows in the pound-dollar exchange rate touching the highest level since March on Friday. Deutsche Bank ended its recommendation to sell the pound last week after a positive meeting between Johnson and his Irish counterpart Leo Varadkar.
Deutsche Bank’s Saravelos sees the potential for more big swings if this week’s EU summit results in a deal.
“If you do have agreement there, there’s quite a lot of risk premium to remove and the sterling price action could be quite quick as we saw on Thursday and Friday,” he said.
The market remains overwhelmingly tilted in favor of selling the pound, though both hedge funds and asset managers have lowered their short positions, according to the latest data from the CFTC. Options traders are betting on gains in the short term.
The pound may continue to strengthen if negotiations between the U.K. and the EU intensify, according to Goldman Sachs Group Inc (NYSE:GS).
“If the two sides do make more progress toward a deal, continued short-covering from real money investors should prolong the rally,” said analysts including New York-based Zach Pandl, Goldman’s co-head of global foreign-exchange and emerging-market strategy. “We think sterling has further to run.”
(Writes through, adds pricing from first paragraph.)
