Pound hovers near one-month high vs weak dollar, languishes vs euro

LONDON (Reuters) - Sterling hovered just off one-month highs reached earlier on Monday against the dollar, with traders reluctant to take big positions on the pound until the conclusion of the Conservative Party leadership contest.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

While the Bank of England sounded less dovish than other central banks last week, providing some support to the British currency, the pound’s moves are being driven by developments elsewhere.

With the dollar suffering a selloff after the Federal Reserve encouraged expectations of a July rate cut, the pound was able to briefly touch a one-month high against the greenback earlier in the session.

But against the euro it languished only slightly above 5-month lows.

Scotiabank analysts noted that CFTC positioning data released at the end of last week, which measures the positioning of speculative investors such as hedge funds, showed “net sterling shorts fell $563 billion”.

However, the market remains heavily short the pound versus the dollar and sentiment is bearish.

Two candidates are left in the contest to replace Prime Minister Theresa May, with eurosceptic Boris Johnson by far the favourite to win a majority of votes from Conservative party members who will decide the next leader and prime minister.

A new leader will be elected by the end of July, leaving only a few months for any new prime minister to try and renegotiate a Brexit withdrawal agreement with Brussels before the Oct. 31 departure date. The European Union has said it will not reopen negotiations over the deal already agreed with May.

Johnson has cast himself as the only candidate who can deliver Brexit on Oct. 31 - with or without a deal - and investors worry his leadership will make an economically-damaging no-deal Brexit more probable.

The pound was down 0.2% to $1.2730 by 1530 GMT after earlier touching $1.2766, its strongest since May 21.

Against the euro, sterling weakened 0.3% to 89.50 pence, not far from the 89.74 five-month low the British currency touched last week.

(Graphic: Sterling vs U.S. dollar link:

(Graphic: Euro vs sterling link:

JP Morgan foreign exchange strategists said they were confident of sterling weakness in coming months.

“The election of a new Conservative leader and PM will likely set up a confrontation with the EU from the late summer at which the UK will try to establish a no-deal exit as a credible tool to exert leverage,” they told clients.

Reporting by Tommy Wilkes; Editing by Louise Heavens and Andrew Heavens