February 27, 2018 / 9:20 AM / a year ago

Sterling edges higher but outlook cloudy

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

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

LONDON, Feb (Reuters) - Sterling edged higher on Tuesday on the back of a struggling dollar though investors remained wary of chasing the British currency higher before a testimony from new Federal Reserve chief Jerome Powell later in the session.

With expectations of a May rate hike mostly priced into financial markets, the dollar’s fortunes has been the dominant driver in recent sterling price action with investors also wary of Brexit-related headlines.

“While the pound’s outlook has improved in recent days thanks to the renewed optimism from the central bank, investors are wary of pushing the British currency higher from these levels unless there is more clarity on the dollar’s outlook,” said Lee Hardman, a currency strategist at MUFG in London.

Powell’s Congressional testimony will be his first public appearance since being sworn in as chairman earlier this month.

Traders will watch closely to see whether the new chief will continue on the gradual monetary rate path pursued by his precedessor Janet Yellen, or whether he will take a more hawkish approach.

Sterling was trading 0.1 percent higher at $1.3978 in early London trading on Tuesday and about 2.5 percent away from a pre-Brexit referendum high of $1.4346 hit late last month.

Against the euro, sterling was broadly flat around 88.24 pence.

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.

Recent Brexit-related headlines have also added to the general uncertainty around sterling.

Brief respite followed a speech by opposition leader Jeremy Corbyn on Monday in which he said his Labour Party wanted Britain to negotiate a new customs union with the EU to ensure tariff-free trade after Brexit.

But Prime Minister Theresa May has ruled out any customs union with the EU after Brexit because it would prevent Britain from striking new trade deals with fast-growing economies including as China and India. (Reporting by Saikat Chatterjee; Editing by Raissa Kasolowsky)

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