Sterling off lows but on track to post biggest drop in month

LONDON (Reuters) - Sterling bounced off the day’s lows but is on track to post its biggest daily loss in a month on Tuesday as expectations of selling pressure from a large corporate healthcare deal prompted investors to take profits after a recent rally.

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

The British currency enjoyed a strong last week after Britain secured a Brexit transition deal with the European Union, official data showed British workers’ wages growing at their fastest rate in nearly 2-1/2 years and the BoE confirmed its hawkish tilt.

Such has been the bullishness around the short-term outlook for sterling that the British currency was trading near Brexit referendum vote highs against most of its rivals, including the Swiss franc

But news that GlaxoSmithKline will buy Novartis’s 36.5 percent stake in their consumer healthcare joint venture for $13 billion in cash triggered an unwinding of long sterling bets against its rivals built up after Britain clinched the transition deal last week.

Sterling’s fall against the franc rippled over into the broader market complex with the pound falling as much as 1 percent against the dollar and 0.5 percent against the euro as investors took profits before the typically volatile quarter end period.

But by late London trading, sterling trimmed losses to trade 0.7 percent down on the day at $1.4140.

“We have seen sterling come a long way over the last week so the [GlaxoSmithKline] deal may well have been the trigger for some profit taking,” said Jane Foley, FX strategist at Rabobank in London.

The British currency was down 0.3 percent against the Swiss franc at 1.3407 francs, its biggest drop since Feb. 8, according to Thomson Reuters data.

Against the dollar, sterling plunged nearly a percent but is still up more than 4 percent so far this year as investors snapped up the pound citing its undervaluation relative to other currencies.

(GRAPHIC - Sterling positions:


Foley said a fall in the pound could also have been caused by quarterly flows as global asset and fund managers rebalance their portfolios, a move that can distort markets.

“There is a fair amount of sterling that has to be sold against the Swiss franc and we are at post-Brexit referendum vote highs,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

On a trade-weighted basket basis, the pound was trading at two-month highs above 80.

A revival in risk appetite in the broader markets also underpinned sterling’s gains in the previous session.

Global markets were shaken this month after U.S. President Donald Trump moved to impose tariffs on Chinese goods and Beijing threatened similar measures, though headlines over the last 24 hours suggested that tensions were receding.

Derivative markets were signalling bullishness for sterling in the short term with three-month risk reversals for the British currency - a ratio of calls to puts -- trading at their highest level in more than a month.

“While the attraction of the euro in part reflects its structural large current account surplus, the pound is benefiting more from expectations of positive cyclical developments,” MUFG strategists wrote in a daily note.

Editing by Mark Heinrich and Richard Balmforth