Friday, 27 January 2017

Sterling slips as investors book profits after surge

Sterling slipped from a six-week high against the dollar on Thursday as investors booked profits after a rally that saw the pound climb almost 5 percent in just 10 days.

The pound had initially risen on data showing Britain's economy maintained its momentum in the final three months of 2016, again defying expectations that June's vote for Brexit would rapidly take a toll on growth.

But it quickly gave up those gains and, after touching a high of $1.2674, was down 0.1 percent on the day by 1100 GMT at $1.2615. That still left sterling on track for its best fortnightly performance against the dollar in 10 months.

"Sterling has had quite a good run over the past week and there now seems to be a bit of a short squeeze," said Societe Generale currency strategist Alvin Tan.

Against the euro, sterling reached a three-week high of 84.71 pence after the data before easing back to trade flat on the day at 85.03 pence.

The focus since Britain voted to leave the European Union has been how that departure plays out - whether it will be a "hard" exit in which Britain leaves the single market or a "softer" one being the key question. Now it appears that investors are turning to fundamentals.

Analysts said that was partly because with more clarity on Brexit, investors could shift their attention from politics.

Prime Minister Theresa May announced last week that Britain is indeed to leave the single market, although she shied away from saying that constituted a "hard Brexit". The pound put in its best daily performance since the 1990s in response. And on Wednesday, May said she would set out her government's plans for Brexit in a white paper.

"These developments have improved sentiment in sterling again, after a very poor showing at the beginning of the year," Tan said .

Investors are looking ahead to the first Bank of England "Super Thursday" of the year next week, when the BoE will present its quarterly inflation report along with its decision on monetary policy.

Inflation has accelerated as sterling has shed 12 percent since the Brexit vote on a trade-weighted basis, leading to market talk that the BoE will take a more hawkish tilt and even signal that it is moving closer to raising rates from their current record low of 0.25 percent.

But a Reuters poll on Monday found most economists expect the BoE to leave its rates and other stimulus measures unchanged at least until 2019, even though it is likely to raise its 2017 growth forecast again next week

Traders will also be watching the results of a meeting between U.S. President Donald Trump and Theresa May on Friday, with trade expected to dominate discussions.

"Sterling will focus on news headlines around PM May’s U.S. visit which, at face value at least, should be positive for the currency," said Commonwealth Bank currency strategist Adam Myers.

Reference: Jemima Kelly

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