Sterling rises from six-month lows as markets settle

FILE PHOTO: An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

LONDON (Reuters) - Sterling recovered on Wednesday from the previous day’s six-month low, as currencies stabilised after Italy’s political crisis sent shockwaves through global financial markets this week.

The British currency edged 0.1 percent higher at $1.3293 after falling to its lowest levels since Nov. 20 on Tuesday. But it weakened against the euro by half a percent, to 87.46 pence, thanks to a broad-based euro bounce.

Hopes that Italy could avoid a new election helped European markets recover from one of their worst sell-offs in years on Wednesday, though markets remained wary <MKTS/GLOB>.

Data last week showed sterling were still vulnerable to any weak economic data, with markets pricing in about one interest rate increase through 2018.

May’s purchasing-manager index will offer some clues on how the economy is faring. A Reuters poll forecast the index would show growth moderated in April.

With monetary policy makers turning more cautious and data-dependent after a subdued first quarter, the PMI releases over the next two weeks deserve particular attention, Goldman Sachs strategists said in a note.

Currency derivatives tied to the outlook for sterling were trading near their lowest levels in nearly three months.

Risk reversals for sterling, a gauge of demand for options on a currency rising or falling, are holding near their lowest levels since early March, indicating that investors are looking to protect downside portfolio risk.

On a trade-weighted basis, sterling was trading at 78.73, not far from a two-month low of 78.53 hit earlier this month.

Reporting by Saikat Chatterjee, editing by Larry King