Sterling near day's highs as risk appetite returns

LONDON (Reuters) - Sterling held near the day’s highs on Tuesday as a broad-based rebound in risk prompted investors to buy the British currency though gains were checked before draft guidelines on a trade agreement between the EU and Britain are published on Wednesday.

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

The chairman of European Union leaders Donald Tusk will present draft guidelines on what the bloc would like to see in a trade agreement with Britain after the country leaves in 2019 and which will be used as basis for further negotiations.

Risky assets received a boost on news that South and North Korea would hold their first summit in more than a decade, with sterling pushed higher after struggling in recent days.

The development on the tense Korean peninsula sent the struggling dollar down half a percent against a basket of its rivals to the day’s lows, buoyed European and U.S. stocks higher, and nudged bond yields upwards.

“The North Korea headlines were the catalyst for the risk rally in markets and that has pulled sterling up,” said Viraj Patel, an FX strategist at ING in London.

After the return of a South Korean delegation from the North where it met leader Kim Jong Un, Seoul said on Tuesday that Pyongyang was willing to hold talks with the United States on denuclearisation and would suspend nuclear tests while those discussions are underway.

The pound rallied half a percent to the day’s highs of $1.3929 before trimming some of those gains to be up 0.3 percent on the day. Earlier in the session, it had fallen 0.1 percent to $1.3835.

But it struggled against the euro, with the British currency weakening 0.2 percent to 89.28 pence.

While many analysts are bullish on the pound if a Brexit transition deal can be secured, uncertainty ahead of an EU summit later this month, at which Britain has said it expects to sign a deal, has kept a lid on sterling bulls.

Prime Minister Theresa May’s Brexit speech on Friday sought to convince the EU that it is in its interests to show flexibility in deciding the shape of the relationship with Britain after its exit, but markets did not perceive sufficient signs of progress in the talks.

Reporting by Tommy Wilkes and Saikat Chatterjee; Editing by Catherine Evans