Sterling bounces on short covering but outlook wary

FILE PHOTO: A one pound coin lies on a Union Flag in this picture illustration shot on May 3, 2017. REUTERS/Darren Staples/Illustration/File Photo

LONDON (Reuters) - Sterling rose for a second consecutive day against the dollar on Thursday as investors covered some short positions after U.S. Federal Reserve Chair Janet Yellen’s testimony knocked the greenback weaker against a broad basket of currencies.

Sterling also had a lift after Bank of England policymaker Ian McCafferty told The Times newspaper the central bank should consider unwinding its 435 billion pound ($562 billion) quantitative easing programme earlier than planned. Strategists expect that bounce to be short-lived.

The latest guess on voting would see 2 or perhaps 3 of the 8 Monetary Policy Committee (MPC) members voting for a interest rate hike in August and the chances of an August hike have now dropped to 14 percent from around 25 percent last week after comments from Deputy Governor Ben Broadbent on Wednesday, ING strategists said.

Broadbent said he was not yet ready to raise rates, which seemed to run contrary to warnings from other policymakers in recent weeks that rates could be lifted soon. Such remarks had pushed sterling above $1.30 at the end of June. Investors are split on whether the BoE will raise interest rates by the end of the year, following in the footsteps of the U.S. Federal Reserve, which has lifted rates twice this year, and the Bank of Canada, which increased rates on Wednesday. “The market is 50 percent priced for a hike by the end of the year – we think that overstates the risk,” said RBC Global Markets strategist Adam Cole.

Sterling was up 0.4 percent on the day at $1.2925. It is trading just above a 20-day moving average which it briefly pierced on Wednesday but analysts remain pessimistic about the near-term outlook.

“With Brexit uncertainty deteriorating economic fundamentals and political risk all weighing heavily on the British pound, further downside may be on the cards,” said FXTM research analyst Lukman Otunuga.

Against the euro, it was trading at 88.09 pence, after hitting a eight-month low against the single currency in the previous session.

Editing by David Evans