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Wednesday, 17 January 2018

Sterling pauses after rally as traders watch Brexit developments


LONDON (Reuters) - Sterling edged lower against the dollar on Wednesday after a rally as traders took profits and awaited the latest developments in negotiations over Britain’s departure from the European Union.

The pound has in recent days reached its highest levels since the vote to leave the European Union in June 2016, with the better-than-expected economic performance of the British economy and hopes that Britain will soon agree a transition deal with Brussels supporting sterling.

“I expect the political noise to move the pound on a short-term basis. But will it change the overall [positive] direction of the last 12 months? I don’t think so,” said Michael Hewson, chief analyst at CMC Markets, who remains bullish on the pound.

Hewson said the only event that could send sterling sharply lower was if talks with the EU broke down completely, which he said did not look likely as Brussels looked more amenable to negotiating with Britain.

The president of the EU Commission, Jean-Claude Juncker, said on Thursday Britain was welcome to rejoin the trading bloc after it has left next year.

In London, the European Union (Withdrawal) Bill is set to complete its first journey through parliament’s lower house some time after 1900 GMT, a milestone on the long road towards cementing the legal foundations of Brexit.

The pound was down marginally against the dollar at $1.3778 after hitting a high overnight of $1.3836. Data on Tuesday showing a slight fall in December inflation in Britain checked the pound’s rally.

Against the euro, which has gained broadly in recent days on expectations the European Central Bank would soon move to rein in monetary policy, the pound was up 0.2 percent at 88.7 pence.

“The talks about the transition period are due to start in late January, the negotiations on future trade relations following an EU summit at the end of March. Until a reversal of the plans is in sight EUR-GBP will continue to trade in a narrow range,” Commerzbank analysts wrote in a note.

Later, the euro fell on Wednesday after rocketing to a fresh three-year high in early trades above the $1.23 line as some investors ramped up bullish bets about the currency though some concerns from policymakers this week damped broader optimism.

Overall dollar weakness and growing optimism about the outlook of the European economy in 2018 has lent fresh legs to the euro’s rally after it gained more than 10 percent last year.

But the speed of the rise in the opening days of 2018 -- up more than 3 percent in the last two weeks -- has invited some comments from ECB officials this week, highlighting some growing concerns, according to analysts.

In an interview to an Italian daily la Repubblica, Vitor Constancio, the vice president of the European Central Bank, said he did not rule out that monetary policy would still continue to be “very accommodating for a long time”.

On Tuesday, Jens Weidmann, Germany’s representative on the ECB’s policymaking body said it would be “appropriate” for the European Central Bank to stop its bond purchases, due to run at least until September.

“The ECB is playing the good cop and the bad cop in terms of their comments over the euro but there is no doubt the currency’s rally has sowed the seeds of uncertainty in the ids of ECB policymakers,” said Viraj Patel, an FX strategist at ING in London.

The single currency rose to a session high of $1.2323 against the dollar in Asian trading before falling 0.2 percent to stand at $1.2238.

For euro bulls, these are key levels for a couple of reasons. Unlike 2017’ summer, when positioning wasn’t as stretched and valuations still reasonably attractive, current levels are not as supportive for the single currency.

Latest positioning data showed that net long euro positions are at a record high while both ECB and IMF valuation metrics show the euro is only about 6-7 percent currently compared to more than 12 percent before the French elections last year.

Morgan Stanley strategists said in a daily note that as long as inflation expectations are met and growth remains strong, the euro’s strength will be tolerated by the ECB.

Elsewhere, Canada’s central bank is widely expected to raise interest rates by 25 basis points and take the benchmark borrowing cost to 1.25 percent. Analyst expect the BoC to raise rates as many as three times in 2018.

The Australian dollar rose 0.1 percent to $0.7970 and the New Zealand dollar dipped 0.1 percent to $0.7260.

Reference: Reuters

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