January 25, 2018 / 9:06 AM / a year ago

Sterling consolidates above $1.43 as dollar dives

LONDON (Reuters) - Sterling settled above the $1.43 line for the first time since the June 2016’s EU referendum as optimism around Brexit and growing expectations of an interest rate increase later this year encouraged investors to add to long positions.

FILE PHOTO - British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

A deepening selloff in the dollar also lifted the British pound, with a trade-weighted index trading at its highest level since end-June 2016.

“We have seen a strong day for sterling but not as strong as yesterday and for the pound to move higher we need to see more of a confirmation that we are headed for a soft Brexit,” said Alvin Tan, a currency strategist at Societe Generale in London.

The pound rallied more than half a percent against the dollar to a high of $1.4346 before stabilising around the $1.43 line.

It is on track for its best month against the dollar in almost nine years, with a 6 percent climb so far in January.

The euro also slipped below 87 pence for the first time since June 2017 and the Bank of England’s trade-weighted sterling index touched its highest since June 30, 2016.

Until now much of sterling’s appreciation against the dollar has been attributed to broad weakness in the U.S. currency, but it has become clear this week that investors have become more bullish on the pound independently.

Data published last Friday showed speculators increased their net-long positions on sterling — or bets that it would rise — to the highest level in 3-1/2 years in the latest week, and that trend shows no sign of having abated.

Analysts have struggled to pinpoint an exact reason for the latest surge. Some say that in the absence of any bad news, sterling has been able to trade on fundamental factors, which point to an economy holding up relatively well, and better than some EU “Remainers” had feared.



But some analysts pointed out that further gains may be tough for the British currency.

“Momentum is fading slightly, which is no surprise after the strength of the move we have seen and we do feel that GBP upside is going to be much tougher going forward from here, so would suggest protective orders for GBP sellers to protect recent gains,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

Others point to encouraging noises from Europe.

French President Emmanuel Macron, for example, said last weekend that Britain would be able to have a bespoke deal with the trading bloc — one of Prime Minister Theresa May’s objectives — although he also said London’s financial centre could not enjoy the same level of access to the EU under May’s current Brexit plan.

But some fear that so much optimism may prove misplaced.

“There (hasn’t) been any specific news driving sterling higher. I think this is a change in positioning that’s been obvious since the start of the year and is gaining momentum,” said Rabobank currency strategist Jane Foley.

Sterling’s latest rally began in earnest in mid-December, when May succeeded in securing a deal to move Brexit talks on to discussions of a transition deal and trade.

“It seems that for many people the two-year transition phase is a done deal, although that hasn’t been confirmed yet,” Foley added. “There’s also a fair amount of optimism about the trade solution for Brexit, which may prove misguided.”

“Though considerably uncertainty surrounds the potential impact on the UK economy of an eventual withdrawal from the EU, we expect the pound to rally if negotiations progress well this year,” wrote SEB currency strategists in a note to clients.

The euro is itself benefiting from optimism around a strengthening economy and a central bank that is moving towards tighter monetary policy. Investors will be given fresh cues for the single currency when the European Central Bank wraps up a policy meeting later in the day.

Reporting by Jemima Kelly and Saikat Chatterjee, Editing by Angus MacSwan

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