Tuesday, 27 February 2018

Sterling cements gains on rate hike bets; customs union hopes

LONDON (Reuters) - Sterling consolidated gains near 10-day highs on Monday as relatively hawkish comments from a central bank official boosted bets that interest rates may rise as early as May while a speech by British opposition leader Jeremy Corbyn helped sentiment.

Dave Ramsden, a deputy governor at the Bank of England who was one of the two policymakers who opposed the BoE’s decision to raise interest rates in November, said in a newspaper interview the central bank may need to raise British interest rates somewhat sooner he expected.

His comments added to the general chorus of optimism emanating from central bank officials in recent days, increasing the odds of a rate hike by May to 70 percent, according to money markets.

“The BOE’s comments have been a big driver for sterling’s gains today and while Corbyn’s comments sound optimistic, we need to see more specifics from them on what they plan to do,” said Derek Halpenny, European head of Global Markets, at MUFG in London.

Sterling held near the day’s highs, up 0.6 percent on the day at $1.4054, while against the euro the pound rose 0.3 percent to 87.79 pence per euro.

Labour Party leader Corbyn said on Monday that he wanted Britain to negotiate a new customs union with the EU to ensure tariff-free trade after Brexit.

As Prime Minister Theresa May tries to strike a divorce deal with the European Union by October, she is facing a rebellion by a small group of pro-Europeans inside her Conservative Party that Labour Party leader Corbyn hopes to use to undermine her authority.

Analysts said Corbyn’s support for a customs union made a so-called “softer” Brexit -- or one in which Britain retains as close as possible ties to the EU after leaving -- more likely, helping reduce Brexit risks that weigh on the pound.

“It’s not a big surprise but this is another one of the members of the BoE changing his view on the need for rate hikes,” Manuel Oliveri, London-based FX strategist at Credit Agricole said. “The predominant driver is the BoE comments.”

Increased expectations of a BOE rate hike in May comes at a time when investors have taken profits into a sterling rally in recent week.

Latest positioning data by Commodity Futures Trading Commission on Friday showed that long sterling positions are down substantially to $8.2 billion compared to more than a 3-1/2 year high of nearly $33 billion in late January.

The British pound peaked at $1.4346 in late-January, a 7.5 percent jump from early December levels. It is now more than 2.5 percent below that high.

Reporting by Tommy Wilkes

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