January 18, 2018 / 9:53 AM / 5 months ago

Sterling steady after recent run-up as Brexit risks take backseat

* Pound pauses after briefly rising above $1.39

* Traders focus on improved Brexit outlook, UK economy

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

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

By Tommy Wilkes

LONDON, Jan 18 (Reuters) - Sterling steadied against the dollar on Thursday, consolidating some of the recent gains that have propelled the pound to its highest levels since Britain voted to exit the European Union.

The pound jumped briefly above $1.39 in New York trading on Wednesday to its highest level since June 2016, although traders said there was no specific news to trigger the surge.

Sterling has in recent sessions been supported by a sell-off in the dollar and more positive noises from Europe over negotiations with Britain over the terms of its departure from the trading bloc.

British Prime Minister Theresa May will host French President Emmanuel Macron on Thursday, where she will be keen to show that Britain still has plenty to offer EU member states as she negotiates Brexit.

With the improved outlook for those negotiations and reduced British political uncertainty, traders said sterling had been able to anchor itself again to the domestic story, where the economy is proving more resilient than expected.

Against the dollar, the pound was flat at $1.3832. The pound was as low as $1.3458 as recently as Jan. 11.

“It seems the Brexit negotiations are starting to pan out. Some of the political uncertainties in the UK are starting to fade. It’s turning into a bit of a momentum rally,” said Martin Arnold, macro strategist at ETF Securities.

Against the euro, which has rallied in recent weeks, the pound was down marginally at 88.22 pence per euro.

Bank of England policymaker Michael Saunders said on Wednesday that British unemployment was likely to fall further than most economists expected this year, pushing pay growth higher.

While he stuck close to BoE language that any interest rate rises would be “limited and gradual”, some analysts believe the bank will be forced to tighten monetary policy faster inflation fails to fall as predicted.

Adam Cole, chief currency strategist at RBC Capital Markets, said sterling “had really recoupled itself to monetary policy” in the current absence of Brexit-related noise, but he believed that as deadlines for a Brexit deal approached sterling would drop again as the difficulty of talks reemerged.

He also said the market was overly optimistic about the BoE following the U.S. in raising interest rates.

“We think the market is mispricing rate hikes for the UK. We see sterling in the $1.20s in the medium term,” he said. (Reporting by Tommy Wilkes Editing by Jeremy Gaunt)

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