Sterling weaker vs euro, focus remains on Brexit

Goldman Sachs saw the pound strengthening to 87 pence against the euro and said "investors with a stronger conviction that risk conditions will improve into year-end should consider expressing the view in cable (sterling/dollar) to also benefit from likely dollar depreciation." The derivatives market showed that traders have bought more protection against future pound volatility.

Sterling fell against the euro on Monday, although not by much, and most analysts say they now expect Britain and the European Union to meet the transition deadline and soon conclude a Brexit deal.

Versus the U.S. dollar, the pound was in neutral territory. British Prime Minister Boris Johnson and the head of the EU's executive, Ursula von der Leyen, agreed in a phone call on Saturday to step up Brexit talks to close "significant gaps" barring a new trade partnership.

Both sides said they have made some progress but not achieved yielded a breakthrough. Johnson does not want the Brexit transition to end without a new trade deal in place, he said on Sunday, but he believes Britain could live with such an outcome.

"While we have frequently cautioned that the more uncertain global backdrop has made it harder to express views on the Brexit process in the currency this year, we are encouraged by the pound’s increasingly idiosyncratic price action as the negotiation deadlines draw near," Goldman Sachs analysts wrote in a note to clients. Goldman Sachs saw the pound strengthening to 87 pence against the euro and said "investors with a stronger conviction that risk conditions will improve into year-end should consider expressing the view in cable (sterling/dollar) to also benefit from likely dollar depreciation."

The derivatives market showed that traders have bought more protection against future pound volatility. The cost for one-month options -- which encompass the timing of a possible Brexit deal -- in sterling/dollar are around their highest level in the last six months. Three-month option costs, however, have fallen, suggesting investors were less concerned about pound volatility at the end of the year, when the Brexit transition period ends.

Dealers also report that demand has grown for sterling call options, allowing them to benefit from any pound gains over coming months. The pound was last trading up 0.1% versus the dollar at $1.2942 and down 0.3% against the euro at 90.80 pence .

Leveraged funds were still shorting the pound, adding to their positions in the week to Aug. 29 and taking the amount of shorts to a two-month high, latest data from the Commodity Futures Trading Commission showed. Sterling has risen 3.4% versus the dollar in the past three months. Against the euro, the gains were marginal.

Britain is contending with rising cases of coronavirus infections. On Sunday, it saw a record 22,961 cases. The government launched a programme on Monday aimed at helping those left jobless by the COVID-19 pandemic to get back into work.

Traders will be looking for August gross domestic product on Friday. Before that are construction PMI on Tuesday and industrial production on Friday.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)