LONDON (Reuters) - Sterling was stable on Tuesday as investors kept their hands off the British currency given that the risk of Britain crashing out of the European Union without a divorce deal on Oct. 31 remained high.
The probability of a no-deal Brexit was still very much a concern for traders as Prime Minister Boris Johnson reiterated that he will take the country out of the bloc on deadline.
Even though the British parliament approved a legislature which forces Johnson to request a deadline extension from Brussels if he cannot agree on a deal with the EU by mid-October, the prime minister said he would not do such a thing.
Johnson’s senior adviser Dominic Cummings said the United Kingdom will leave the EU on time and reporters should get outside London and speak to people who are not “rich Remainers”.
“The market is extremely cautious because of Johnson’s stance,” said Jane Foley, Rabobank’s senior currency strategist. “Anxiety is hanging over markets.”
The pound enjoyed a relief rally on Monday after better-than-expected economic data eased investor worries about a technical recession in Britain, and after Goldman Sachs cut its expectations for a no-deal Brexit.
But “whilst there has been a relief rally in sterling, the market is going to be quite nervous until more clarity emerges” on what sort of relationship Britain is going to have with Europe after it exists the EU, said Foley, adding “it will be quite some time until uncertainty clears”.
Sterling was flat at $1.2353 by 1530 GMT , having jumped to a six-week high the day before. Against the euro, the pound was neutral at 89.44 pence.
Over the course of six months, since the initial Brexit deadline was extended, the pound has shed 7.5% of its value against the dollar, making it one of the worst-performing major currencies.
Leveraged funds remained short in the British currency, though in recent weeks they have trimmed some of those short positions as the pound reached low critical levels.
Hedge funds held a total of $6.42 billion of short positions as of last Tuesday, according to data from the Commodity Futures Trading Commission, not far from the two-year high of $7.81 billion achieved at the beginning of August.
Average British earnings including bonuses rose unexpectedly by 4% year-on-year in the three months to July — the biggest pay rise in more than 11 years — compared with a 3.7% growth in June, but the data did not have a major impact on the pound.
Some investors choose not to consider the current state of the British economy when they trade sterling as Brexit remains their top priority.
The uncertainty over the relationship Britain will have with the EU after it exits the bloc makes it hard to understand where it will be in five years in terms of trade relations, said Kenneth Broux, head of corporate research at Societe Generale
“We’re trading sterling politics, not the economy,” Broux said.
Sterling 2019 performance: here
Reporting by Olga Cotaga; Editing by Susan Fenton and Ed Osmond