Sterling hurt by equities drop; speculators cut short positions

LONDON, Jan 24 (Reuters) - The British pound touched a two-week low versus the dollar in early London trading on Monday, hurt by investor caution brought on by falling stocks and tensions between Russia and the West.

Investors are bracing for a U.S. Federal Reserve meeting this week, in which the central bank will likely announce the timing of rate hikes. Meanwhile, the United States told diplomats’ families to leave Ukraine.

The dollar was slightly firmer and riskier currencies such as the British pound and Australian dollar suffered.

The pound hit a two-week low of $1.3534 but by 0844 GMT was broadly flat on the day at $1.35455.

Versus the euro, it edged up around 0.1% to 83.595 .

The pound also hit a one-month low versus the Japanese yen, after the pair tumbled 1.4% last week.

Lee Hardman, currency analyst at MUFG, said that the dollar-pound pair has had its strongest sustained period of positive correlation to global equity markets since 2013.

This “highlights that the pound is vulnerable to further near-term weakness if equity market weakness extends.” he wrote in a client note.

“Unfavourable equity market developments have taken away some of the support for the pound from the ongoing hawkish repricing of BoE rate hike expectations.”

Investors expect the Bank of England to hike rates in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.

Speculators reduced their net short position on the pound in the week to Jan 18, according to CFTC data. This left the overall speculative positioning on sterling close to neutral - the most bullish it has been since October last year.

Analysts said the pound was not hurt by political scandals surrounding Prime Minister Boris Johnson. An investigation into parties at Johnson’s official residence during Britain’s 2020 lockdown is due to be published this week.

“We do not expect heightened political uncertainty to materially impact pound performance given there is unlikely to be any near-term change in government policies,” said MUFG’s Hardman.

ING FX strategists Chris Turner and Francesco Pesole told clients: “Politics has yet to hit GBP on the view that even if PM Johnson were to resign, Chancellor Sunak would be seen as a safe pair of hands as an alternative.”

Retail sales data last week showed a slump in December. UK flash PMI data is due at 0930 GMT.

Reporting by Elizabeth Howcroft; Editing by Kirsten Donovan