Sterling edges lower as Brexit overhang dogs investors

LONDON (Reuters) - The pound edged down from $1.33 on Wednesday as investors tried to gauge whether the resignation of two ministers over Prime Minister Theresa May’s Brexit plans would affect an expected interest rate hike this summer.

Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain September 6, 2017. REUTERS/Phil Noble

The currency’s weakness was limited, however, as investors were wary of taking large bets before more clarity on the Brexit negotiations emerged.

British trade minister Liam Fox said on Wednesday he did not believe Britain’s new Brexit strategy would inhibit its ability to agree trade deals with countries around the world, after two cabinet colleagues resigned over the policy.

“Sterling is in a consolidation phase at these levels as markets await more clarity on the Brexit negotiations front,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Tentative signs of a recovery in Britain’s economy after a sluggish spell have lifted expectations of an August interest rate hike to more than 60 percent from less than 50 percent two weeks ago.

The resignations of Foreign Secretary Boris Johnson and Brexit minister David Davis on Monday rattled May’s grip and stirred talk of a leadership challenge less than nine months before Britain is due to depart the EU. Sterling tumbled more than a cent.

Even if May is safe, the big question for markets is whether EU leaders will go along with her Brexit plans as a new round of negotiations begins later this month.

Markets had welcomed May’s official blueprint - outlined on Friday - because they believe it makes a softer Brexit, in which Britain retains close trade ties with the European Union after its exit next year, more likely.

On Wednesday the currency regained its poise, and moves were mostly muted.

Sterling rose to as high as $1.3285 - roughly where it was on Friday before the resignations - before a rallying dollar knocked it back to $1.3236, down 0.2 percent on the day.

Against the euro, sterling extended gains, spurred on by weakness in the common currency though it retraced later.

The pound was flat at 88.35 pence per euro.

Traders are also preparing for more British economic data that, if better than forecast, may heighten expectations of a Bank of England interest rate rise.

Sources told Reuters that some policymakers said an increase was possible as early as July 2019, while others ruled out a move until autumn next year. [FRX/]

Reporting by Tom Finn, Editing by Mark Heinrich