Sterling soars to 6-week high against weakening euro

Thu Nov 10, 2016 | 12:54pm EST

By Jemima Kelly and Patrick Graham | LONDON
Sterling surged 1.5 percent to a six-week high against the euro on Thursday, as investors unwound short positions against the pound amid uncertainty about the fallout from the U.S. election and focused on upcoming European political risks.

The pound's almost 20 percent slide since Britain voted to leave the European Union in June has been the main currency story on developed markets in the months that have followed, and investors have built up record short positions against it on the view that it has further to fall.

But the fog of uncertainty created by Donald Trump's victory in the U.S. presidential vote, after a campaign that included a range of potentially disruptive policy pledges, from building a wall between the United States and Mexico to declaring China a currency manipulator, could provide a different set of impulses over the next few months.



Having fallen against the dollar on Wednesday, sterling gained more than 1 percent on Thursday to reach as high as $1.2542 .

If Trump's victory foreshadows more victories for populist politicians in Europe over the next year, that may also give Britain more cover from the politically driven selling that has hurt sterling since the Brexit vote in June.

Against a weakening euro - which faces a slew of political events in the coming months, from an Italian referendum next month to French presidential elections in the spring - the pound climbed to 86.70 pence, its strongest since the end of September.

"If you want to concentrate on the rise of populism, Europe is more of a risk," said UBS Wealth Management currency strategist Geoffrey Yu. "In the currency world if you do want to pick up some cheap assets...sterling would probably be first in line."

Data on Wednesday showed Britain's trade deficit with the rest of the world narrowed in the three months to September, a sign that the collapse in sterling may be starting to have an impact on one of Britain's big weaknesses.

But indicators show investors are still betting on sterling weakness. Positioning readings showed short positions close to their highest on record last week.

HSBC currency strategist Dominic Bunning said those stretched short positions were one of the reasons that sterling had rebounded on Thursday - with the uncertainty surrounding Trump's victory, investors would want to square up their positions, he said.

"Structurally, we remain fairly bearish on the pound. We have $1.20 for the end of the year and $1.10 for the end of next year," he said.

Against a trade-weighted basket of currencies, sterling hit a five-week high of 76.5 =GBP, up 1 percent on the day. It is on track for its best fortnightly performance in almost eight years on a trade-weighted basis, having climbed around 3.5 percent.

(Editing by Hugh Lawson)