It’s as if a weight is lifting from the shoulders of sterling’s traders.
A measure of risks to sterling, following the June 23 vote on Britain’s membership of the EU, has tumbled by the most since the country narrowly avoided an inconclusive general election last year.
And though the pound is still the worst-performing currency in the developed world in 2016, during the past week it’s been the biggest gainer.
The UK currency has been a barometer of sentiment throughout the referendum debate, sliding to a seven-year low against the dollar about a week after the date of the vote was announced, and now rallying as the “remain” camp gains traction.
These latest moves point to renewed optimism that a Brexit will be avoided, and suggest traders are reassessing whether they went too hard, too fast in betting against sterling.
Sterling has also strengthened for an eighth day against the euro — in its longest winning run since June.
“It’s essentially a change in perception with regards to the probability of a Brexit,” said Richard Benson, managing director and co-head of portfolio investment at Millennium Global Investments.
“The move is not so much people taking profit, it’s people stopping out their losses in sterling positions,” he said.
Sterling would fall 15% against the dollar from current levels if the UK voted to leave the EU, Mr Benson said.
That would mean a drop to about $1.23, after it touched an almost three-month high of $1.4579 yesterday. A decision to remain would result in a gain of 3% to 5%.
There’s a lot at stake if sterling continues its gains.
Hedge funds and other large speculators pushed net bets on a weaker pound to an almost three-year high of 55,152 contracts in the week through April 19, according to the Commodity Futures Trading Commission in Washington.
As recently as November, they were bullish on the UK currency. In the last week, pro-Europeans have taken the lead. An ORB/Telegraph poll published yesterday indicated that 51% of the UK voters would vote to remain, with 43% wanting to leave.
“The pound is outperforming on Bremain,” said Neil Jones, head of hedge-fund sales at Mizuho Bank.
“We’ve become so fixated on what will happen if Brexit occurs, we’ve forgotten whether Brexit will actually occur at all,” he said.
Three-month implied sterling-dollar volatility fell to 13.8% on Monday in its biggest one-day drop since May 8, 2015, the day after the UK’s general election.
The measure has fallen further since, to a one-month low of 13.1%, compared with a six-year high of 16.4% on April 7.
“It makes sense to take some risk off the table” if traders made money on sterling’s losses in the first quarter, said Grant Peterkin, a money manager in Geneva at Lombard Odier Investment.
“But volatility in sterling will remain as we head toward the vote.”
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