LONDON (Reuters) - Sterling fell on Wednesday as the U.S. dollar bounced off earlier lows after the Democrats took the lead in runoff votes that will determine control of the U.S. Senate.
A Democrat-controlled Senate is seen by some financial market analysts as helping global economic growth and favouring riskier assets, while negative for bonds and the dollar as the U.S. budget and trade deficits would be likely to grow.
The pound fell 0.4 to $1.3554 versus a rebounding dollar, but was still close to a May 2018 high of $1.37 which the British currency tested on Monday. Against the euro, the pound weakened 0.5 to 90.70 pence.
“With the market’s medium to long-term view still pointing towards the `back to normal’ trade, downside on the pound should be limited, especially as positioning is very neutral,” Jordan Rochester, a strategist at Nomura, said.
For now, though, markets remain cautious on its outlook, with the expected damage to the British economy from a new lockdown announced this week raising expectations that the Bank of England will announce more policy easing.
Money markets now expect the central bank to take benchmark interest rates into negative territory as early as May, compared with an August estimate just after the post-Brexit trade deal was struck last month.
And while bullish pound bets have registered a fourth consecutive week of gains, weekly positioning data shows the size of the gains in the latest week is far smaller.
(Graphic: GBP valuations: )
Reporting by Saikat Chatterjee; Editing by Larry King and Alexander Smith
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