Sterling on course for strongest month since 2009

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Sterling’s trade weighted index, compiled by the Bank of England, has risen by more than 5% in the last 30 days. If it holds its rise for another week, November will be the most positive month for sterling since January 2009.

The pound is roughly flat against the greenback since President-elect Donald Trump’s victory on November 8, in contrast to practically every other major world currency.

The euro is down by more than 4% over the same period, the yen is down by 7.5%. Some emerging market currencies have been even harder hit: the Mexican peso has dropped by more than 10% since the election.

The comparatively strong performance of the pound is something of a mystery. Little has changed with regards to the UK’s approach to Brexit since Nov. 3, when the High Court of England and Wales ruled that the government required a parliamentary vote to begin the process of leaving the EU.

But since then, sterling’s strength has continued.

One explanation is that the higher inflation driven by the pound’s sharp drop could force the Bank of England to hold back from cutting interest rates again. Sterling’s weakness could also offer some stimulus to export sectors.

“Both developments might persuade the BOE to become less dovish,” said Citigroup foreign exchange analysts in a recent research note.

Extremely short positioning among speculators could also be driving sharp upward movements in the pound. When investors short a currency, they have to then purchase it to close their position, a process known as short covering. If many investors behave in that way at the same time, it could drive the pound higher.

“Position adjustment and no new negative news from the Brexit negotiations should continue to allow [the pound] to rebound,” said Morgan Stanley researchers in a note this week.

In the week to Nov. 15, the US Commodity Futures Trading Commission recorded 80,313 more short than long futures contracts on the pound.

But some forecasters are betting on a resumption of the pound’s downward trend.

Deutsche Bank analysts expect the pound to fall much further in the year to come, especially against the dollar. In the final quarter of 2017, the bank’s foreign exchange analysts see sterling at just $ 1.06, which would mean a drop of nearly 30% from its June 23 high.

“Sterling is cheap, but not cheap enough to attract inflows amid significant growth and political risks,” the Deutsche Bank strategists wrote in a research note this week.

This article was published by The Wall Street Journal’s MoneyBeat blog

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