Sterling recovers slightly from 7-month lows after May wins Brexit vote

LONDON (Reuters) - Sterling rebounded from a seven-month low against the dollar and hit the day’s highs versus the euro on Wednesday after Prime Minister Theresa May won a crucial Brexit vote in parliament, averting a rebellion that could have undermined her authority.

The new polymer 5 pound Sterling note featuring Sir Winston Churchill, is unveiled at Blenheim Palace in Oxfordshire, Britain June 2, 2016. REUTERS/Joe Giddens/Pool

The pound’s gains were limited, however, with traders divided as to whether May’s victory would boost her chances of securing a more favourable Brexit deal with the European Union given how many more months of negotiations remain.

Investors were also reluctant to take out big positions before a Bank of England monetary policy meeting on Thursday.

“Is it (Britain) heading towards a softer Brexit or at the same time does this further weaken Theresa May’s standing,” said Credit Agricole currencies analyst Manuel Oliveri.

“One has to keep in mind that the focus is shifting to the BoE. It makes no sense to put positions on beforehand,” Oliveri said, adding that speculative investors like hedge funds had largely exited sterling markets.

May needed the lower House of Commons to pass her Brexit blueprint, or EU withdrawal bill - legislation that will prepare Britain for a divorce next March that will end its more than four-decade-old trading and political partnership with the rest of Europe.

Her deeply divided party was conflicted over the role of parliament in deciding a final Brexit deal.

The vote was expected to be extremely close until a pro-European Union lawmaker leading rebels threatening to vote against May said on Wednesday he had changed his mind and would now support the government.

Sterling, gained 0.3 percent to $1.3218, its day’s high. Earlier in the day the pound had hit its lowest since mid-November 2017, of $1.3145.

The currency has fallen more than eight percent since hitting a 22-month high above $1.4370 in mid-April.

Against the euro, the British currency rose 0.3 percent to 87.69 pence after trading close to flat before May’s parliamentary victory.

Attention now turns to the BoE meeting.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Market expectations are for a less than 40 percent likelihood of the Bank of England’s Monetary Policy Committee (MPC) raising interest rates by August, with about an 80 percent chance of one more rate hike by the end of 2018.

“An on-hold MPC should leave the pound without a strong directional push as global forces dominate. A hawkish dissent may see some modest downside in euro-sterling after the ECB,” TD Securities said.

“Dovish risks may be best expressed in cable amid a broadly stronger dollar and ongoing Brexit concerns.”

Reporting by Saikat Chatterjee and Tommy Wilkes, Editing by William Maclean