February 12, 2018 / 10:26 AM / 7 months ago

Sterling rebounds from 3-week low as dollar weakens broadly

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

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

By Tommy Wilkes and Jemima Kelly

LONDON, Feb 12 (Reuters) - Britain’s pound edged up against the dollar on Monday, with a weaker U.S. currency helping sterling rebound from a three-week low reached last week after the EU’s chief Brexit negotiator warned a transition deal was far from assured.

Last week sterling suffered its biggest falls against the dollar since October, hit first of all by broad strength in the U.S. currency amid a sharp stock market sell-off and then by worries that Britain could leave the European Union in a disorderly manner, triggered by Michel Barnier’s warning.

The pound’s weekly losses came despite a surprisingly hawkish policy meeting from the Bank of England, which said interest rate rises could come sooner and more quickly than investors were expecting.

Markets moved to price in a 70 percent chance of a rate hike in May after the meeting, and sterling jumped by more than 1 percent against the dollar and euro, but its gains were shortlived.

With equity markets recovering from last week’s slide on Monday, however, the return of risk appetite encouraged investors to sell dollars and buy back into riskier currencies.

The pound rose 0.3 percent to $1.3863. It was flat against the euro at 88.54 pence.

“This [sterling’s move higher] is on the back of the broader dollar sell-off,” said London-based Michael Hewson, analyst at CMC Markets. “The pound got hit quite hard on Friday. We are getting a little bit of a rebound.”

Hewson said inflation data due on Tuesday would be important in determining sterling’s direction, and that wages numbers due next week would be even more crucial as they would help shape the market’s expectations for when and how fast the BoE would raise interest rates.

The pound has climbed more than 4 percent against the dollar over the past two months, on the back of perceived progress on talks with the EU on what a future relationship between the two will look like when Britain leaves in 2019, as well as some cautious optimism on the economy.

But it is now down around 3.5 percent since hitting an 18-month high in late January.

Derek Halpenny, head of European market research at MUFG in London, said Britain’s ability to secure a transitional arrangement with the EU would affect BoE policy and, by extension, sterling’s trajectory.

“If a transitional agreement is not reached in the coming months, the BoE would be less likely to follow through on their plans to raise rates in May, although Governor Carney did not go as far as to completely rule out a hike in that scenario,” he wrote in a note to clients.

“We still believe that securing a transition deal is the most likely outcome, although the risk of a renewed period of pound weakness would increase if the UK government drags its heels in the coming weeks and months.” (Reporting by Tommy Wilkes and Jemima Kelly)

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