Sterling held steady on Monday ahead of the start of Brexit negotiations, with investors also awaiting comments from a top Federal Reserve official to see whether the US dollar’s recent rise can be sustained. The British pound was little changed at $1.2777. It hardly budged on news that a van ploughed into worshippers leaving a London mosque on Monday, killing at least one person and injuring several. Sterling has been through a turbulent month, sinking to a near two-month low of $1.2636 on June 9 on the British election shock, but rallying last week as the Bank of England came close to hiking rates after a split vote in its monetary policy committee.
It is expected to remain vulnerable to bouts of volatility in coming months as negotiations proceed on Britain’s divorce from the European Union. Investors are focusing on the UK government’s stance in the talks, after the ruling Conservative party’s setback in this month’s election deepened uncertainty over both Prime Minister Theresa May’s Brexit plans and her political future. The UK government may be open to making some concessions, and aim for a “soft” Brexit, said Tareck Horchani, head of sales trading Asia-Pacific, for Saxo Bank Group in Singapore.
“At least for a while, I don’t think the (Brexit) negotiations will be on the hard landing side,” he said, adding that Sterling is likely to be well supported at $1.25. There is considerable uncertainty over the UK’s stance on Brexit talks, however, and some analysts are cautious about sterling’s near-term prospects. “While medium-term GBP appreciation is still likely, the tail risks of a no-deal or disorderly Brexit scenarios have increased, and should weigh on GBP,” wrote currency strategists at Barclays.
The euro treaded water at $1.1194 after gaining about 0.5 percent on Friday. The common currency showed little reaction to French President Emmanuel Macron winning a commanding majority in his country’s parliamentary election on Sunday, according to official figures and pollster projections. Analysts said polls had favoured Macron and that his victory had been mostly factored in.
With concerns about euro zone political risks having receded after Macron was elected as France’s president in May, the euro is likely to hold firm in the coming months, said Peter Chia, FX strategist for United Overseas Bank (UOB) in Singapore. “Our bias is for euro currency to eventually benefit from inflows. I think investors are under-invested for that region for the longest time,” he said.
The dollar index, which measures the greenback against a basket of six major rivals, held steady at 97.172. The index had climbed to a two-week high of 97.560 late the previous week after the Fed raised interest rates and kept the door open for another hike in 2017. But its rally was tempered by Friday’s weaker-than-expected housing and consumer sentiment data. The market is looking to comments by New York Fed President William Dudley, who is due to take part in a roundtable with local business leaders on Monday.
“In the wake of Friday’s weak U.S. data, Dudley could provide insight into whether the Fed is still poised to continue normalising monetary policy,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. “My view is that Dudley won’t sound too dovish, and thus allow the dollar’s gradual rise to resume.” Against the yen, the dollar inched up 0.1 percent to 110.95 yen.