May 30, 2018 / 3:27 PM / 7 months ago

Sterling rises from 6-month lows; PMI data eyed

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Saikat Chatterjee

LONDON, May 30 (Reuters) - Sterling recovered on Wednesday from a six-month low the previous day as currencies stabilised after Italy’s political crisis sent shock waves through global financial markets.

Purchasing managers’ index data for the manufacturing sector on Friday will offer the first test for sterling bulls as recent economic data have indicated that another rate hike from the Bank of England this year is not a done deal yet.

Market-implied probability for another rate hike until end-2018 stood at 60 percent, less than around 90 percent two weeks ago, according to Thomson Reuters data.

“Recent economic data have indicated a soft streak in the UK economy apart from retail sales, and we need to see further signs of improvement before sterling can break above currency ranges,” said Gavin Friend, an FX strategist at NAB in London.

The British currency edged 0.1 percent higher at $1.3273 after falling to its lowest levels since Nov. 20 on Tuesday. But it weakened against the euro by half a percent, to 87.51 pence, thanks to a broad-based euro bounce.

Hopes that Italy could avoid a new election after all helped European markets recover from one of their worst sell-offs in years on Wednesday, though markets remained wary.

May’s purchasing-manager index will offer some clues on how the economy is faring. A Reuters poll forecast the index would show growth moderated in April.

With monetary policy makers turning more cautious and data-dependent after a subdued first quarter, PMI releases over the next two weeks deserve particular attention, Goldman Sachs strategists said in a note.

Currency derivatives tied to the outlook for sterling were trading near their lowest levels in nearly three months.

Risk reversals for sterling, a gauge of demand for options on a currency rising or falling, are holding near their lowest levels since early March, indicating that investors are looking to protect downside portfolio risk.

On a trade-weighted basis, sterling was trading at 78.73, not far from a two-month low of 78.53 hit earlier this month. (Reporting by Saikat Chatterjee, editing by Mark Heinrich)

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