The pound rose on Monday after the European Union sealed a Brexit deal but the currency's gains were curbed by doubts about Prime Minister Theresa May getting the agreement through a divided British parliament.
With European leaders finally endorsing May’s plan for future ties between Britain and the bloc, sterling traders are focused on a parliamentary vote on the deal likely to take place in mid-December.
For now, the odds look stacked against May with criticism of the agreement approved in Brussels on Sunday from all sides, including from the Northern Irish party propping up her minority government.
“The failure of the pound to rally on recent positive developments suggest the market is pricing in that the deal won’t pass the first time in parliament,” said Lee Hardman, a currency analyst at MUFG.
“During the next two weeks the pound will likely trade with increased volatility,” he added.
Brexit negotiations and political uncertainty in Britain remain the key drivers for the pound, and many analysts are cautious about its prospects.
The pound traded up 0.3 per cent versus the dollar at $1.2852 at 11.30am and traded flat against a resurgent euro at 88.43 pence.
Recent positioning data suggests hedge funds have started to unwind large short positions on sterling as hopes grow that Britain may manage to negotiate an orderly Brexit.
Net short positions on the pound saw their fourth biggest weekly drop in over a year, according to CFTC data for the week ending November 16th.
But growing domestic opposition to May’s Brexit arrangement has continued to pressure sterling, pulling it down 2.5 per cent from a November 7th high of $1.3176.
“The outcome being priced into GBP right now is the idea of a successful second vote in parliament on the negotiated deal and an orderly exit on March 29th,” said Simon Derrick, chief currency strategist at BNY Mellon.
Derrick said a “significant financial market reaction” to the failure of the first vote could help concentrate the minds of the politicians that voted against it.
May will hold an emergency cabinet meeting on Monday to brief ministers on her strategy before beginning a two-week campaign to sell her plan directly to the British electorate. – Reuters
