Tuesday, 8 November 2016

Sterling slips vs resurgent dollar after best week in seven years

Sterling fell around 1 percent on Monday after recording its best week in seven years, against a dollar that was trading higher across the board on growing confidence that Hillary Clinton would win Tuesday's U.S. presidential election.

Democratic candidate Clinton's prospects brightened on Sunday when the FBI said it would not seek criminal charges related to her use of a private email server for government work, standing by its findings in July.

That sent the dollar up against most major currencies, with sterling no exception. Having rebounded almost 3 percent last week as worries eased that Britain would undergo a "hard" exit from the European Union and lose its access to the single market, the pound lost 1 percent to trade around $1.24.

"There are two sides to this story - there's the dollar politics and sterling politics," Rabobank currency strategist Jane Foley said.

"If there still is the perception that the UK may after all be faced with a 'soft' Brexit, then sterling should find some support, but the outcome of the U.S. election is clearly dominant now."

Worries about a "hard Brexit" were soothed last week when Prime Minister Theresa May's government lost a landmark High Court case over whether it could trigger Article 50 - which begins Britain's exit from the European Union - without parliamentary approval.

Investors reckon that parliamentarians - the majority of whom voted to stay in the EU in June's referendum - are likely to push for Britain to keep access to the single market.

Sterling was also boosted last week by better-than-expected economic data, Mark Carney's announcement that he would stay on as governor of the Bank of England until 2019 and the BoE scrapping its plans for rate cuts.

But despite that rebound, the pound is still trading 17 percent lower against the dollar than it was trading before the referendum.

A Reuters poll taken in the past few days found economists reckon sterling's plunge has brought the currency to the ideal rate for the British economy, even though it would stoke inflation - a challenge for a BoE that is keeping monetary policy accommodative in order to drive growth.

"(Today's move) is more of a technical move, because we had an important rally last week after the Article 50 news – there is no particular macroeconomic justification to it," said BNP Paribas currency strategist Clara Leonard. "We remain bullish on sterling in the medium term."

Against the euro, sterling was flat on Monday at 89.05 pence.

Reference: Jemima Kelly

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