Sterling pauses after rallying on growing Bremain hopes

[TOKYO] The British pound eased against the dollar on Tuesday, a day after posting its biggest daily gain in 7 years on the back of opinion polls that swung in favour of the campaign for Britain to stay in the European Union.

Two opinion polls on Monday showed that the "Remain" camp has recovered some ground in Britain's European Union referendum debate.

The implied probability of a "Remain" vote in Thursday's referendum rose to around 78 per cent after falling as low as 60 per cent last Thursday, according to odds from gaming website Betfair.

The British pound eased 0.1 per cent in Asian trade to US$1.4658, having pulled back from a three-week high of US$1.4721 set on Monday. It rose 2.1 per cent on Monday, its biggest daily gain since late 2008.

"The market is reacting to every twist in opinion polls but trading is becoming choppy because people are avoiding taking big positions ahead of the poll. Our options desk was fairly quiet yesterday," said Kyosuke Suzuki, director of forex at Societe Generale.

"Polls seem to suggest support for 'Remain' is rising, but the truth is we won't now until we see the results," he said.

This is the third time the currency pair has tested the US$1.47-48 band since May and a clear break of those levels could spark a wave of short-covering in the pound.

But traders also said any break may have to wait until the markets see the results of Thursday's referendum.

"Until then, there could be more ups and downs," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

The latest swing in opinion polls in favour of the "Remain" camp also adds to the risk of an especially sharp market reaction if the actual vote result, expected to reach markets on Friday morning in Asia, were to go the other way, Mr Murata added.

"As a risk, we have to be on guard on the Tokyo morning of June 24... It could lead to a pretty serious situation if the result turns out to be 'Leave'," he said.

The implied volatility on pound options have fallen notably as investors see a diminishing chance of the "Leave" camp winning. The three-month volatility last stood at 13.3 per cent , compared with a high of 18.5 per cent last week.

The euro rose 0.5 per cent against sterling to 77.31 pence , regaining a bit of ground after setting a near three-week low of 76.925 pence on Monday.

Against the dollar, the euro edged up 0.1 per cent to US$1.1326.

The dollar index stood at 93.582, holding above a one-month low of 93.425 hit earlier this month, as the market awaited US Federal Reserve Chair Janet Yellen's testimony before the Senate Banking Committee at 10 am local time (1400 GMT).

The dollar edged up 0.1 per cent to 104.01 yen. Earlier on Tuesday, the dollar slipped to 103.58 yen, bringing the yen close to its 22-month high of 103.555 set last Thursday.

"At the root of the yen's strength lie diminishing yield gaps between Japan and the US. Since expectations of further easing in Japan have waned, Japanese exporters' bids tend to support the yen," said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank.

After the yen's latest rise, Japanese Finance Minister Taro Aso said on Tuesday that Japan would respond to rapid currency moves in line with G7/G20 agreements, although the country would not intervene in the market so "easily".

The dollar briefly fell from around 104.10 yen to 103.85 yen or so after Mr Aso's comments, but later stabilised.

REUTERS