LONDON (Reuters) -The pound edged higher on Monday but lagged behind other risk-linked currencies, as investors focused on talks over post-Brexit trade arrangements for Northern Ireland as well as the likelihood of the Bank of England raising rates next month.
Relations between Brussels and London have deteriorated in recent weeks after Britain, unhappy with the Brexit deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16 of the Northern Ireland Protocol, potentially leading to a trade war.
Britain and the EU will intensify their efforts to break the impasse this week, the European Commission’s Maros Sefcovic said.[nL9N2N802N]
Analysts were split over how much impact the Brexit tensions were having on the pound, which benefited from a “risk-on” mood in currency markets but lagged behind peers.
At 1242 GMT, the pound was up 0.2% versus the dollar at $1.3436, up from the 11-month low of $1.3354 it hit on Friday last week GBP=D3. [nL1N2S60K3]
Versus the euro, it was flat, at 85.28 pence per euro.
“The FX market has still been quite reluctant to price in any Brexit-related risk premium on GBP,” wrote ING strategists in a note to clients.
“Our moderately bullish bias on GBP for the remainder of the year is tied to the view that markets will continue to steer away from embedding much political risk into GBP.”
Weekly CFTC positioning data showed that speculators are overall bullish on the pound versus the dollar.
But one-month risk reversals – a gauge of the market’s expectations of the pound’s direction – hit their lowest since December 2020 on Thursday last week. The gauge is in negative territory which indicates the market expects the pound to fall.
“The ever-falling level of the risk reversals suggests that the market is getting increasingly worried about the pound, which I suspect has something to do with the UK brinksmanship around Article 16,” Marshall Gittler, head of investment research at BDSwiss Group, said in a client note.
Neil Jones, head of FX sales at Mizuho, said that the Brexit tensions were “a continuing headwind for sterling” but that until there is clear event such as triggering Article 16, the move will be a “gentle slow grind lower… as opposed to a sharp move.”
In the week ahead, markets will be focused on the UK jobs report on Tuesday and CPI data on Wednesday.
The Bank of England will be the first major central bank to raise interest rates but whether that initial increase comes as soon as next month or early next year has divided economists polled by Reuters.
Mizuho’s Jones said the pound was also being weakened by investors reducing their expectations for a rate hike in December.
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