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UPDATE 1-Sterling weaker vs euro, focus remains on Brexit

Mon, 5th Oct 2020 12:22

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote
(Adds derivatives info, chart and updates prices)

By Olga Cotaga

LONDON, Oct 5 (Reuters) - 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.

(Reporting by Olga Cotaga, editing by Larry King)

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