Sterling inches lower but market shows signs of "Brexit fatigue"

LONDON (Reuters) - Sterling inched lower on Tuesday, kept under pressure by uncertainty over the terms of Britain’s exit from the European Union, though some analysts said the currency was becoming less sensitive to domestic political developments.

U.S. dollar and British pound notes are seen in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration

The pound’s biggest moves were against the safe-haven yen, falling 1 percent to a 12-week low of 137.12 yen as the Japanese currency climbed across the board amid risk aversion across markets.

Analysts said the broad fall in risk appetite was driven by worries over an upcoming meeting between U.S. President Donald Trump and Chinese President Xi Jinping and French elections beginning at the end of the month.

For sterling, political risk has been in the driving seat for nine months, with the currency losing around 17 percent against the dollar since Britain’s vote to leave the European Union last June.

But some major banks have begun to say that the pound will no longer rise and fall on the slightest development around Brexit, now that two years of negotiations with the EU have been formally triggered.

“Does sterling want to trade off a running commentary on Brexit? I think the answer is no,” said UBS Wealth Management currency strategist Geoffrey Yu, in London, adding that “Brexit fatigue” had set in among investors.

“There’s only so much the market wants to monitor. We’re now quibbling over $1.24, $1.25, but we’ve come down from $1.50, so enough of a risk premium has been priced in already.”

A parliamentary committee said on Tuesday that British Prime Minister Theresa May must prove that “no deal is better than a bad deal” by offering an economic assessment on the impact of leaving the EU with no agreement.

Yu’s comments echoed an April outlook from Japanese bank MUFG, which argued that the pound had become less sensitive to Brexit developments.

ING currency strategist Viraj Patel said markets were focussed more now on the outlook for the Bank of England, suggesting investors had begun to rethink when the Bank might raise interest rates from their record lows.

That rethink, he said, could explain sterling’s weakness over the past two days, when it has fallen almost 1 percent. It was down 0.3 percent on Tuesday at $1.2450.

BoE Governor Mark Carney is set to give a speech on Friday, while fellow Monetary Policy Committee (MPC) member Gertjan Vlieghe speaks on Wednesday.

Markets moved last month to price in a chance of an interest rate rise in the next year, after outgoing MPC member Kristin Forbes unexpectedly voted for a hike.

But many economists say that despite accelerating inflation, the central bank is unlikely to tighten monetary policy while Britain is negotiating its exit from the EU in talks over the next two years.

Sterling was down 0.1 percent at 85.61 pence per euro EURGBP=D3.

Editing by Susan Fenton