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Investors have cut their bets against the pound for the first time since the beginning of June as the currency has recovered off near-historic lows, but analysts warn that volatility still looms with the Brexit deadline just 10 weeks away.

Traders are grappling with how to price the currency amid deep political uncertainty as the chances of a disruptive exit have risen under Boris Johnson’s premiership. Opposition efforts to stop the UK crashing out of the EU have offered the pound some respite, although many in the foreign exchange market are deeply sceptical about their chances of success.

Fund managers and other companies betting in the futures market trimmed their bets that the pound will fall in the week to August 13, after adding to them for eight consecutive weeks.

“Non-commercial” players in the futures markets — a category that includes individual investors, hedge funds and other asset managers — are still heavily short the pound, but decreased their shorts positions to 95,820 contracts, from a more than two-year high of 102,720 the previous week, according to Commodity Futures Trading Commission data.

Kit Juckes, global head of foreign exchange strategy at Société Générale in London, said the data suggested that “100,000 is about as big a net sterling short as the market can cope with.”

“The net short got close to 2017’s maximum but failed to break through and sterling found a bit of support too,” he added.

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Sterling rose nearly 1 per cent against the US dollar last week to trade back above $1.21, following four consecutive weeks of losses as Mr Johnson has publicly embraced the possibility of leaving the EU without a deal at the October 31 Brexit deadline. Against the single currency, the pound rose 2 per cent to trade above €1.09.

“This is a very tentative recovery because there is still uncertainty,” said Antje Praefcke, senior foreign exchange strategist at Commerzbank. The fear is that time is running out, he added, and it might not be possible to stop Mr Johnson.

The pound was the best performing developed market currency last week, according to Bloomberg data, but fresh selling pressure on Monday underlined concerns over parliament’s chances of blocking Mr Johnson.

Neil Jones, head of foreign exchange sales for financial institutions at Mizuho Bank, said “the market is having some doubts over the anti-Brexit uprising in parliament.”

He added that weekend bleak reports over the UK’s no-deal contingency planning, dubbed ‘Operation Yellowhammer’, were also weighing on the currency.

“While MPs that are opposed to a no-deal Brexit have made baby steps in the direction of blocking a EU exit without a deal, they are still a long way from achieving that objective,” said Silvia Dall’Angelo, a senior economist at Hermes Investment Management.

The outcome of parliament’s confrontation with the Johnson government is unlikely to emerge much before the Brexit deadline, Ms Dall’Angelo added, meaning “September and October could be wildly volatile months for sterling.”

Expectations for sharp swings in the currency over the next three months, measured by bets in the options market, have risen sharply over the past six weeks as traders position themselves for a turbulent autumn.

“Most people do not have a main scenario. We see 50:50 no-deal or a deal,” said Ms Praefcke.

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