Sterling steady as Fed, BOJ take focus off Brexit briefly

[LONDON] Sterling steadied against a broadly weaker US dollar on Tuesday, in the run-in to US and Japanese central bank meetings that were taking the market's focus temporarily off the latest concerns over the shape of Britain's exit from the European Union.

The pound had staged a modest recovery on Monday after slipping below US$1.30 last week for the first time in a month.

It traded 0.2 per cent higher in early deals on Tuesday at US$1.3047 and 85.87 pence per euro respectively.

The focus was briefly on the Bank of Japan and US Federal Reserve meetings both ending on Wednesday, although Brexit concerns will take over once those events are out of the way.

"Sterling is doing the better part of nothing ahead of tomorrow's FOMC. The noise on Brexit over the past week has given us more reason to sell any rallies," said Tobias Davis, Head of Corporate Treasury Sales at Western Union in London.

"US$1.33 was viewed as a short term uptick by most in the market and a decent enough level to sell, but the currency remains sticky around fairly significant support lines at US$1.3030-1.3040."

After a period of relative calm over the summer, debate around the pace and dangers of negotiations with Brussels over how Britain will exit the EU are back in the spotlight.

The head of Germany's Bundesbank warned on Monday that banks based in Britain would lose access to EU markets after Brexit unless the country remains in the broader European trading group that includes nations such as Norway.

That suggested Berlin may take a tough line on an issue that carries with it the risk of undermining London's huge financial sector, which accounts for around 10 per cent of the UK economy as a whole.

The Bank of England also underlined the risks last week, warning that it may still need to cut interest rates again despite some stronger than expected signals on the economy in the past month.

All that said, positioning data suggests investors have become net slightly less negative on the outlook for the pound in the past week while still holding massive "short" bets that leave them exposed to any rise.

Analysts from Dutch bank ABN Amro said they had upped their forecasts for the pound for the end of the year.

"With positions being this substantial, other positive surprises in UK macro-economic data will likely result in an enormous squeeze of these net-short sterling positions," ABN analyst Georgette Beale said.

"Our year-end forecasts for EUR/GBP and GBP/USD are 0.83 and 1.33, respectively. The risk is tilted towards the upside."

REUTERS