Sterling sticks to significant gains as the EU's chief negotiator signaled a potential breakthrough in UK divorce talks, raising the prospect of a huge amount of negative currency bets.
The pound climbed more than a cent on Wednesday after Michel Barnier said the EU was "ready to partner with the UK, unlike any other third country".
His statement was not entirely new and meant no surrender to British requests; He also insisted that the foundations of the EU, including the single market, would not be affected. Nonetheless, currency traders who appear to be embroiled in the pessimistic view that Britain will break out of the EU next March without any trade, were put on the defensive.
On Thursday, the pound is still well above $ 1
"Sterling does not fight any deal Brexit risks becoming very unattractive," said Viray Patel, an ING analyst, explaining his point of view on the following Chart showing that hedge funds reacted strongly to sterling in the first few months of this year
While the politically contaminated pound has lived off a prayer in recent weeks, we believe that now a lot of bad news is priced in – making risk reward no longer fearing the chasing away of the marginalized pricing in any deal Brexit fears. The strong recovery of the pound in response to Barnier's constructive comments (though the rest of the rhetoric drags the usual EU party line) reflects this risk / reward tradeoff. Given the extent to which leveraged funds have lost sterling in recent months, we believe the pound will now be more receptive to constructive Brexit headlines than to negative (or status quo no deal brexit) noise.
Some market watchers remain cautious.
"The market seems more hopeful," RBC analysts write. "However, we emphasize that even if an agreement is concluded between the EU and the United Kingdom, an even greater hurdle will be to obtain an agreement on the British House of Commons … In any case, it will be unlikely that the Barnier stressed yesterday when he emphasized the importance of the integrity of the internal market, saying in a tweet that "there will be no special rules for post-Brexit UK".