Sterling dips as Brexit transition deal concerns grow

LONDON (Reuters) - Sterling edged lower on Thursday as the dollar gained ground ahead of next week’s expected rise in U.S. interest rates, while scepticism about the prospect of a smooth Brexit transition deal also weighed on sentiment.

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

The British currency slipped 0.2 percent to $1.3942 as broader currency markets stuck to established ranges before a G20 meeting next week amid rising trade tensions.

There was no new economic data to drive the pound, but traders remained focused on a Bank of England policy meeting next week and a European Union leaders summit where Britain has said it will strike a transition deal to cover its relations with the bloc immediately after Brexit in March 2019.

“With investor appetite for the British pound limited amid Brexit uncertainty, bulls are finding it increasingly difficult to keep prices buoyed,” said Lukman Otunuga, an analyst at FXTM.

Worries have grown that Britain and EU officials would fall short of securing a transition arrangement at the March 22-23 summit as differences have grown in recent days. Such an outcome could question market expectations of a 25 basis point rate increase by the UK central bank in May.

“I think sterling markets don’t actually think there’s going to be much progress in the next couple of weeks. When we look at sterling, it should be trading above $1.40, but there’s a bit of a Brexit risk premium pressed in,” said Viraj Patel, currency strategist at ING.

“It suggests that the propensity for sterling to rise is higher if we get some good news.”

Against the euro, sterling strengthened 0.2 percent to 88.36 pence.

Sterling hit $1.4346 on Jan. 25, its highest level against the U.S. dollar since Britain voted to leave the European Union in June 2016.

Though it has pulled back modestly from those highs, it remains near the top of its trading range of $1.20 to $1.43, buoyed by hopes a Brexit transition deal will be eventually be struck and a generally weaker U.S. currency.

Michael Hewson, chief analyst at CMC Markets, said that if the pound could not push above the $1.40 level, it ran the risk of a move back towards the month’s low, of $1.3710.

Additional reporting by Saikat Chatterjee; Editing by Mark Potter