Time for a sterling complacency check

Complacency remains the sterling trader's biggest enemy

The talk of the morning was that Germany’s Chancellor Merkel might be willing to set a 5-year limit on the Northern Ireland backstop. After the inevitable denial, the pound unceremoniously dumped a near 70-pip gain. This again illustrates the huge divide between the market’s appetite for promising news versus the reality that Britain still hasn’t agreed a deal and could crash out in three days. The pound hasn’t traded below $1.29 since February.

This sort of optimism has a recent precedent. Bullish exuberance also culminated around midnight after 23^rd June 2016’s referendum, with sterling peaking at $1.50. GBP/USD has printed up to 6% higher since 1^st January, according to Refinitiv data. It peaked by a similar amount weeks before the referendum. Then as now, options markets were getting bored. Sterling’s net short was far bigger though.

Best, case, assume an extension is granted. A year-end option’s a higher probability amid Tuesday reports that France’s Macron wants a delay no longer than end-2019, whilst the EU opposes an extension to 30^th June, Theresa May’s preferred length. A 9-month pause would almost certainly see more multi-dimensional wrangling. Meanwhile, Brexit’s cap on growth and investment would continue and the BoE would stay on hold. As we’ve seen, that doesn’t preclude resilient economic readings. These could lift sterling to the top of its dominant $1.28-$1.34 one-year range, but a sustainable upside break is unlikely.

The bottom line is that boring ranges have been profitable ranges this year and sturdy stops enable survival for far longer than optimism alone.