Currency speculators cut back their bets against sterling as a growing list of economic reports showed the British economy weathered the aftermath of June’s vote to leave the European Union without a major shock.
Sterling has started to climb back from its initial Brexit-led plunge of more than 10% as data from business surveys, retail sales, exports, construction, house prices and auto demand all showed remarkable stability through July and August.
Its recovery to a near-two month high against the dollar was cemented by figures yesterday that showed Britain’s all-important services sector in August staged its biggest recovery in the survey’s 20-year record, expanding far faster than economists had expected.
As the economy’s resilience to Brexit confounds economists — and undermines the Bank of England’s worst fears — it has also unnerved currency speculators who had built up their biggest bets ever on the pound falling further.
Last week saw the first reduction for nine weeks in these net short positions on the Chicago Mercantile Exchange, according to Commodity Futures Trading Commission data.
It was a relatively small shift, to a net short position of 92,486 contracts worth just under $8bn from a record 94,978 contracts the week before.
But previous episodes of extreme bets against sterling over the past 20 years suggest the currency’s recovery has further to run and that these short positions are vulnerable to a potentially substantial unwinding.
“Expectations of a UK recession are receding and there are question marks over whether the BOE was too aggressive in easing,” said Manuel Oliveri, an FX strategist at Credit Agricole.
“What we are telling clients is there is still a risk of position squaring and sterling can run up to $1.35-$1.36,” he said. The pound rose to $1.3375 yesterday, its highest since July 15.
That was up more than 4% from the 31-year low just under $1.28 it struck in the days just after Britain voted to leave the European Union.
Britain’s services sector, which accounts for over 70% of UK economic output, expanded last month at such a pace to cast serious doubt on the view that the country would slip into recession this year.
Markit’s services purchasing managers index (PMI) jumped to 52.9 in August from 47.4 in July.
A reading above 50.0 denotes expansion, and below 50.0 contraction. The rebound from July was the biggest in the 20-year history of Markit’s data.
Echoing Markit’s analysis of the data, JP Morgan’s UK economists said the risk of imminent recession has receded.
They maintained their call for further policy easing from the BoE this year but raised their 2016 growth forecast to 1.9% from 1.7% and next year’s forecast to 0.9% from 0.6%.
Bank of England Governor Mark Carney faces a severe test tomorrow when he explains the Bank’s recent actions, thinking and outlook to British lawmakers. Some on the Treasury Select Committee are highly critical of the Bank’s perceived role in “Project Fear” surrounding the economic consequences of Brexit, and its decision last month to cut interest rates to a record low 0.25% and revive its bond-buying ‘quantitative easing’ stimulus programme.
He might point out that Brexit itself has not yet occurred. Prime Minister Theresa May says the process of disengaging from the EU won’t begin until next year.
It will take up to two years to complete. Nevertheless, the fact remains that the shock of the Brexit vote dissipated much faster than many expected. “We have not changed our expectation that the BoE will cut rates further in November.
However, there is more uncertainty around that view now,” said Alan Monks, UK economist at JP Morgan.