April gains prove to be brief for struggling sterling

LONDON (Reuters) - Sterling fell to a one-month low on Monday as the dollar rebounded across the board thanks to firmer U.S. Treasury yields while governor Mark Carney’s comments last week raised doubts on the likelihood of an interest rate increase next month.

UK pound coin plunges into water in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

With no breakthrough in sight for the Irish border issue and first-quarter GDP data due Friday, foreign exchange markets are braced for further weakness in the pound in a month which has historically proved to be supportive for the British currency.

Graphic: Sterling positions -

“It is hard to see where sterling finds support in the short term as Brexit headlines haven’t been very supportive recently and there is dollar strength across the board,” said John Marley head of FX strategy at Infinity International, a currency risk management firm in London.

The pound has been one of the best performing major currencies in 2018 and last week surged to its highest level since the Brexit referendum in June 2016.

But weaker-than-expected wage growth and inflation, and comments by Carney that the data was “mixed” hit the currency hard, sending it towards its biggest weekly loss in two months as investors rushed to price in the possibility the BoE could delay raising rates until later in the year.

Expectations of a rate hike at a May 10. policy meeting is now less than 50 percent after being more than 80 percent a couple of weeks ago, though some analysts warned against betting too much on holding policy steady.

“We think the UK data this week may be enough to rekindle rate hike expectations,” said ING FX analyst Viraj Patel.

But he cautioned that politics could have an impact on sterling this week if a cross-party and non-binding technical vote on Brexit on Thursday threatened Prime Minister Theresa May’s leadership.

Britain expressed confidence on Friday that no hard border with Ireland would return following Brexit, but European Union negotiators have dismissed a proposal by Britain on how to ensure goods would flow freely after it quits the EU.

Sterling’s big losses last week have raised worries for the short-term outlook of the British currency as April has traditionally proved to be a supportive month for sterling due to dividend repayments and a pick up in capital inflows.

The pound weakened 0.3 percent to $1.3961, its lowest levels since March. 19 as broad dollar strength kept the pound under pressure.

Against the euro, the pound recovered and rose 0.2 percent to 87.63 pence.

The dollar was trading half a percent higher against a basket of rivals as ten-year U.S. Treasury yields stood a whisker below yields of 3 percent.

Reporting by Saikat Chatterjee and Tom Finn; Editing by Richard Balmforth