Sterling trades above $1.22, focus on third-quarter growth data

LONDON (Reuters) - Sterling held above $1.22 on Monday, bolstered by better risk sentiment across global markets, though expectations that Britain’s economy would suffer due to the country’s likely exit from the European Union was limiting gains.

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In the past few weeks when politics took the front seat, concerns about a “hard” Brexit by Britain and a hardline stance by the EU in the negotiations that are likely to start next year saw sterling take a battering and fall to a record low on trade-weighted terms.

This week, the focus will be on the third-quarter growth readings for the economy due to be released on Thursday.

After a strong second-quarter, Britain’s economy is expected to slow and is forecast to grow at 0.3 percent in the third quarter. The report will be the first reading of how the broad economy has performed in the immediate aftermath of the shock vote to leave the EU in June. So far, all the evidence has suggested that the economy has held up well and the country is likely to dodge a recession.

“At this early stage, there won’t be a breakdown of the expenditure components, so we will remain in the dark for another month about the extent to which business investment has been hit by post-referendum uncertainty,” said Elsa Lignos, senior currency strategist at RBC Capital.

Sterling was flat at $1.2233, drawing strength from higher stock markets. The pound often tends to move in sync with riskier assets, given the country’s large current account deficit. Given the dour outlook for sterling, speculators have been building bets against the pound in the past few weeks.

“Positioning in sterling remains very short and that could discourage further aggressive selling especially if UK data remains fairly resilient,” Credit Agricole analysts said in a note.

The currency has shed nearly 18 percent against the dollar since the June vote with losses accelerating in October after British Prime Minister Theresa May raised the spectre of a “hard” Brexit. Under a “hard” Brexit the government will negotiate for an exit that favours tighter immigration controls over free trade, likely curbing foreign investment needed to fund Britain’s huge current account deficit.

Monthly figures from the Confederation of British Industry showed the biggest drop in factory orders since February. The October monthly survey showed markedly weaker total order books -- down to -17 from -5 in September -- which analysts said was probably due to weakening domestic demand.

Against the euro, the pound was flat at 89 pence. The single currency had been hurt by European Central Bank chief Mario Draghi’s comments last week when he quashed speculation that the ECB was considering how to wind down bond purchases.

Reporting by Anirban Nag; Editing by Toby Chopra