The pound slipped from the highest level in six months as the rally after U.K. Prime Minister Theresa May’s announcement for June elections was seen as overdone.
Short-term traders faded Tuesday’s move, when the pound jumped above $1.2900 to the highest since Oct. 3. Still, technical charts suggest that a close this week above $1.2798 would open room for a test above $1.30, and banks such as Nomura Holdings Inc. and Bank of America Merrill Lynch see lower risks and potential for the currency to rise further.
The pound traded 0.1 percent lower at $1.2830 by 10:45 a.m. in London, ahead of a vote around 2 p.m. in parliament on whether to hold an election for June 8. May said she has set out her plans for the U.K.’s departure from the European Union and now needs a mandate from voters, and the election would give her one.
“The tail risks for sterling have narrowed, the general election could give the U.K. government more time and this consequently reduces the downside risks to sterling that we had anticipated,” Kamal Sharma, strategist at Bank of America, said in a note to clients, adding it expected higher front-end pound volatility heading into the election.
Deutsche Bank AG exited all its bearish sterling trades on Tuesday. Nomura expects the pound to head higher, testing $1.30 against the dollar and appreciating toward $1.32 in the short term. It recommends fading such a move as a ‘hard Brexit’ is still likely and would weaken the U.K. economy, currency strategist Yujiro Goto said in a note to clients.
Traders’ positioning and a short-gamma market at current levels may add momentum to bullish technical developments
On the weekly chart, a close above $1.2798 opens room for test of 55-week moving average at $1.3014; the MA has effectively capped the pair since September 2014
The next resistance comes near $1.3070, where lies the weekly trendline starting from July
A large part of trailing stop-losses have been triggered on holdings from leveraged names with an average price above $1.3000, with additional ones seen now above $1.3050 and $1.3100
Leveraged funds’ net GBP shorts stood at 51,520 in the week through April 11 while asset managers’ GBP shorts were at 82,057, near a one-year low hit in March
Support is at 1.2775, the high on Dec. 6, and at 1.2754, which represents the daily pivot and 1.2706-03, the mid price for April 18
Options to expire today include GBP/USD at 1.2750 for GBP315 million
The yield on benchmark 10-year gilts increased 3 basis points to 1.04%