London: As dust from the UK elections started to settle, the pound found support from model accounts as the lows seen on the immediate aftermath of the vote have yet to be breached.
Sterling has once again rebounded after visiting $1.2630-40 area, forming a triple bottom on the daily charts. Real-money names were also seen on the bid, according to Europe-based traders. Given these accounts have a long-term horizon in mind and tend to stay sidelined amid political woes, this demand could represent squaring of shorts. CFTC positioning shows that for the week ended June 6, pound shorts among asset managers and institutional investors were close to their lowest levels since October 2015.
Data showed that UK annual inflation rose more than forecast in May to a four-year high and cable initially nosedived by 30 pips to $1.2687 as higher consumer prices amid subdued wage pressures are seen as a drag on the economy. Yet, the move was short-lived as political developments and Brexit negotiations matter more for now.
A similar technical development was seen in euro-sterling as the pair failed to meaningfully rise above the 50 per cent retreat of its drop since the October flash crash. A daily close above 0.8860 could open the way for the shared currency to revisit its November highs above 0.9000. Demand has risen this week for upside exposure through vanilla calls and topside reverse knock-out structures, said the traders, who asked not to be identified as they weren’t authorised to speak publicly.
Given investors prefer to trade any pound weakness via the euro, as the dollar may face headwinds from political stability as well, the cost of hedging price swings in euro-pound may soon eclipse that on cable.
