August 22, 2016 / 8:51 AM / a year ago

Short-covering lifts sterling as bets against it hit record high

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

LONDON (Reuters) - Sterling gained on Monday, after registering its strongest week in five against the dollar as a run of robust economic data suggested Britain’s economy was faring better than expected following its vote to leave the European Union.

With little in the way of domestic political or economic developments on Monday, analysts said the pound’s gains could be mainly attributed to investors closing out hefty short positions against it in order to avoid losses from any upward moves.

Data released by the Commodity Futures Trading Commission on Friday showed positioning is stretched: sterling net short positions soared to a record high of 94,238 contracts in the week to Aug. 16.

The political uncertainty surrounding Brexit has darkened Britain’s economic, business and investment outlook, and the Bank of England’s first interest rate cut in seven years and relaunch of its quantitative easing programme this month has only piled on more pain for sterling.

“Speculators have been adding to their short positions every week since the UK voted to leave the EU - clearly, the pound has been becoming a one-sided trade,” said Forex.com analyst Fawad Razaqzada.

“But what this means is that you will get to see lots of short squeeze rallies every now and again, especially as the main sterling-negative factors are already out of the way now, including the Brexit vote and the Bank of England’s response.”

Sterling was half a percent up on Monday at $1.3144 and up 0.6 percent against the euro at 86.10 pence.

The pound was boosted last week by inflation and retail sales numbers for July that beat forecasts, adding to signs there has been little immediate impact on consumers from the Brexit vote. Better-than-expected jobless claims data also lifted the currency.

Some of the week’s gains, however, were eroded on Friday when sterling posted its biggest one-day fall against the dollar in two weeks - 0.7 percent - on a Bloomberg report that Britain could formally begin the process of leaving the EU early next year.

A government spokeswoman said Prime Minister Theresa May would not invoke Article 50 of the EU’s Lisbon Treaty, which formally begins divorce proceedings, before the end of this year. “We don’t recognise this briefing,” a Downing Street spokeswoman said when asked about the report.

“The... price action on Friday (was) a gentle reminder about the risks sterling faces once UK-EU negotiations on terms of Brexit start,” said ING currency strategist Petr Krpata.

“Despite the already meaningful fall, and very cheap valuation levels, we still look for more sterling downside in coming months, both against the euro and the dollar.”

editing by John Stonestreet and Raissa Kasolowsky

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