Sterling in for bumpy ride

LONDON (Reuters) – Forex Signals | Currency markets are signalling a bumpy ride for the British pound; as tighter lockdown measures are expected to offset Brexit deal optimism that propelled the currency above $1.37 on Monday.

FX Signals

The pound’s rally to May 2018 highs is widely attributed to traders unwinding their short-term hedges, selling their protection against a weakening currency, rather than betting on further gains after Britain.

Sterling gains on Brexit deal

On Monday, Prime Minister Boris Johnson announced a new national lockdown to combat the COVID-19 pandemic..

Sterling gains dollar on back foot

At these levels, it may be difficult to continue to push higher with further escalations in the Covid numbers and the prospect of longer, more stringent lockdowns to come.”

Dec. 24. One-month Sterling-dollar volatility is up to nearly 9% compared to 7% for a broader basket of currencies.

Forex Signals – Dollar Weakens Ahead of Sterling

Meanwhile, CFTC figures — the closest proxy to real-time changes in investor positioning — indicate hedge funds turned net bullish on the pound in early December.

FX Signals – Dollar treads water

“The relief of a Brexit deal that was apparent in the markets will fade quickly despite broad U.S. dollar weakness,” he said.

Still, the view on the currency is far from the bearishness seen during the rough phases of Brexit negotiations.

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For instance, the ratio of puts (right to sell) over calls (right to buy) has lessened considerably; Sterling-dollar three-month risk reversals were around -0.9 on Tuesday, a fraction of their -4.5 in early December, signalling bearish bets have declined. Expectations of a weak dollar has also helped.

Pound Swings as Traders

“If the dollar depreciation trend speeds up quite a bit over the next month or two, I could easily see there being some decent demand for topside cable, and that may just push the three-month risk reversal back up to positive territory again,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Sterling in for bumpy ride