November 29, 2016 / 10:36 AM / a year ago

Sterling rises as investors cut bets against currency

LONDON (Reuters) - Sterling bounced back against both the dollar and the euro on Tuesday, keeping the currency firmly in the $1.23-$1.26 range it has held for the past two weeks in the absence of new concerns over how Britain will leave the European Union.

The pound got a small boost on Tuesday after data showed lending to Britons expanded last month at the fastest annual pace in 11 years, while mortgage approvals were stronger than expected, bolstering the picture of resilient consumer demand after June’s Brexit vote.

Against a broadly weaker euro, sterling climbed by as much as 1 percent to trade back below 85 pence, having just recorded its longest run of weekly gains since early 2015 against the common currency.

Sterling is still almost 10 percent weaker against the euro compared with before Britain’s vote to exit the European Union. But it has climbed 5 percent since the start of November as the euro has weakened on uncertainty over an Italian constitutional referendum on Sunday and French and German elections next year.

“There remains concern about the Italian referendum and I think that’s likely to continue to dominate activity in Europe for the next few days - that’s probably why sterling is stronger against the euro,” said Societe Generale currency strategist Alvin Tan.

Against the dollar, sterling climbed 0.7 percent to $1.2499, having topped $1.25 in afternoon trade..

The way in which Britain exits the EU has dominated sterling’s direction since the vote to leave in June. But with few new clear developments in recent weeks, analysts said the currency was treading water. Tuesday’s moves reversed a similar shift in the opposite direction on Monday.

“Technical considerations may have played a role yesterday, there may have been a push by the market to trigger some stop losses, but it is extremely difficult right now to give hard reasons,” said Alexandre Dolci, a strategist with Spanish bank BBVA in London.

“We see sterling remaining quite vulnerable until Article 50 is triggered and talks on leaving the EU begin next year, with cable dropping to 1.18 by the end of the first quarter. But then a gradual recovery to just above $1.25 by the end of the year.”

The British government denied on Tuesday that a document photographed in the hands of an official from the ruling Conservative party - which said the strategy for Brexit talks was to “have cake and eat it” - accurately reflected its plans for forthcoming EU divorce negotiations.

The handwritten note also said Britain would be unlikely to stay in the European single market, and that the government was “loath” to bring in “transitional” arrangements.

It suggested Britain could seek a “Canada Plus” deal - a reference to a trade deal agreed between Canada and the EU last month after seven years of talks.

Data from the Commodity Futures Trading Commission released on Monday showed speculators’ bets against sterling fell for a second straight week, to the lowest since September. [IMM/FX]

“Sterling short positioning continued to fall last week, mainly in the absence of any fresh selling triggers,” wrote Credit Agricole currency strategists in a research note.

“Given stable BoE (Bank of England) monetary policy expectations, and as political uncertainty is unlikely to increase in the short-term, the risk of additional position squaring is likely to continue intact.”

Editing by Gareth Jones

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