LONDON, Sept 22 Sterling rose on Monday, inching
back towards recent two-year highs against the euro and moving
higher against the dollar as investors focused on Britain's
economic fundamentals and interest rate expectations after
Scotland's independence vote.
The euro traded 0.2 percent lower against sterling at 78.64
pence, not far off a two-year low of 78.10 struck on
Friday amid relief over the Scots' decision in a referendum to
reject independence and to stay inside the United Kingdom.
The pound rose 0.35 percent against the dollar to trade at
$1.6340, with the greenback coming under some pressure
after it posted its 10th straight week of gains on Friday.
"We continue to see further upside to sterling this week as
the currency should now return back to fundamental drivers, with
the UK data obtaining more prominence again," said Petr Krpata,
currency strategist at ING.
"We still think that the pound has to do some more catching
up following last week's back-to-normal correction in short-end
He added that the UK two-year bond yield was not
far from its July highs and a break above that levels would take
it to its highest in over three years, giving sterling a boost.
With the uncertainty over the Scottish referendum out of the
way, investors judged that one more obstacle to an interest rate
hike from the Bank of England was cleared for the time being.
Sterling overnight interbank average rates are pricing in
the chance of a first rate increase by the BoE in the spring of
2015. Analysts said sterling stood to gain more against the euro
and yen since both the European Central Bank and the Bank of
Japan are likely to stick with an ultra-loose monetary policy.
The U.S. Federal Reserve reiterated last week that, while
near zero rates would be maintained for a considerable time,
rate hikes could come at a faster rate next year and in 2016.
The Fed nudged up its expected path of interest rate increases -
or Fed dots - boosting yields on U.S. notes, and hence the
appeal of the dollar.
And although the dollar gave back some of its gains on
Monday, traders said the pound's rebound against the greenback
would be capped. They said uncertainty over future
constitutional changes in the United Kingdom following the
Scottish referendum could weigh on investment flows.
"We expect sterling/dollar rebounds to remain limited,
keeping the downtrend intact," Morgan Stanley said in a note.
"Political uncertainty is set to remain as the general
election approaches next year and there is a constitutional
debate regarding providing more powers to Scotland in
combination with changes to English MPs only voting on English
issues," Morgan Stanley said in a note.
(Reporting by Anirban Nag; Editing by Gareth Jones)