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Pound's prospects to be shaped by 'bones' of Brexit trade talks
[LONDON] Pound traders are about to get their first insight into how the currency may fare in the next phase of the Brexit talks as negotiators move on to the potentially more complicated stage of discussing trade.
Sterling may be vulnerable as UK Prime Minister Theresa May addresses lawmakers on Monday and meets with her cabinet ministers this week to begin mapping out what they want Britain's future trade relationship with the European Union to look like.
Meanwhile, with Mrs May under pressure from businesses to secure a transition period for when the nation leaves the bloc, the European Commission is planning to unveil its latest stance on the issue on Wednesday.
Following her defeat at the hands of her own party in trying to prevent an amendment to legislation that grants lawmakers a meaningful vote on the final Brexit deal, Mrs May faces another knife-edge session in Parliament this week on her plans to put a specific leaving date into law. If that wasn't enough to contend with, there is acknowledgment among leaders, including the German Chancellor Angela Merkel, that the next stage of the UK-EU negotiations will be even harder than the first.
"These are going to be the things that are very dominant for sterling - whether or not there's going to be more tension in Mrs May's government, whether or not there'll be tensions with the EU," said Jane Foley, head of foreign-exchange strategy at Rabobank International in London. "The bones of negotiations will be of particular interest."
Sterling rose 0.2 per cent to US$1.3350 as of 08.40 am in London, having posted a second weekly decline on Friday. Against the euro it was little-changed at 88.24 pence. Ten-year gilt yields were steady at 1.15 per cent, near their lowest level in three months.
Hard-line proponents of Brexit may choose next week's cabinet meeting as a further opportunity to try and impose their vision of trade with the EU, with a sudden exit still a possibility, according to Ms Foley. Foreign Secretary Boris Johnson warned over the weekend that the UK could become a "vassal state" of Brussels should any trade deal prevent the country from being able to discard EU laws.
With Mrs May's strategy being questioned by challengers both home and abroad, she faces some difficult meetings this week. On Monday, the Cabinet's Brexit subcommittee is due to discuss for the first time the desired goal for the negotiations; then the whole Cabinet will ponder the same question on Tuesday.
"Sterling is still carrying a premium reflecting risk of a hard Brexit," Ms Foley said. "Over the next two months, the tone will be set."
Meanwhile, data that may drive the currency this week include consumer confidence numbers on Thursday, and gross-domestic-product and current-account statistics on Friday.
Investors may also scour comments from Bank of England Governor Mark Carney on his latest thoughts on Brexit when he answers lawmaker questions at Parliament's Treasury Committee along with other BOE financial-stability officials on Wednesday. The central bank kept its key rate on hold on Thursday and maintained a cautious outlook.