Sterling's rise this year could be down to trader 'bias', strategist says

Key Points
  • The British pound has been the best performing G-10 currency in 2019.
  • This despite no clear agreement on how, or even when, Britain will leave the European Union.
  • Currency traders appear to have priced out the possibility that Britain will leave without a deal.
The British pound fell to an all-time low against the dollar as markets balked at the new government's planned overhaul of the U.K. economy.
Chris Ratcliffe | Bloomberg | Getty Images

Traders of the British pound have shown a bias towards belief that a soft Brexit will happen but a disorderly exit from Europe remains very much alive.

That's the view of Rabobank's Head of FX Strategy, Jane Foley, who told CNBC on Tuesday that the currency's history as the best performing G-10 currency in 2019 may reveal one-way thinking among city traders.

"I don't know if it's because London is a 'Remain' city or if perhaps because many traders are European, but the way sterling has traded all the way back to 2016 has shown a definite bias," Foley said via phone.

The currency strategist said there seems to have been a view that a hard Brexit will be avoided and that had led to a situation where "a lot more good news was baked into the price than bad news."

The pound ticked up on Monday morning to $1.331 following data that showed U.K. labor market resilience and political developments that led the majority of traders to interpret that Brexit will now be delayed.

Some support may also have come from German Chancellor Angela Merkel who said Tuesday that she would "fight to the last minute" to secure an orderly Brexit and when asked if she would consent to a delay, she said maintaining good relations with Britain were "close to my heart."

Foley argued that any long delay to Brexit might see sterling "knee-jerk" to $1.40 but that figure would be hard to maintain as uncertainty lingered.

"You prolong the pain further and you hurt business investment. That will lead to cracks in the economy and probably in the labor market."

At Swiss bank UBS, the central forecast remains that Prime Minister Theresa May will get her draft deal through the U.K. Parliament, an orderly transition will occur, and sterling will reach 1.38 versus the dollar by the end of 2019.

The bank's Head of UK Rates Strategy, John Wraith, told CNBC Tuesday by phone that that trading level may also be achieved by a long extension to Britain's departure from the European Union but uncertainty would persist.

"I think it would have a similar impact economically, but it obviously has a rather different impact, politically," he said.

Wraith added that a long extension would be viewed by some as a failure of the current government and could see sterling "infected by political risk."

The currencies strategist said European leaders and lawmakers might this week offer the U.K. government some change to the future declaration document, allowing Theresa May the room to seek a fresh vote in Parliament.