Sterling holds steady ahead of Brexit talks

Sterling sank to a near two-month low on the British election shock, but gained last week

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.

Sterling has been through a turbulent month, sinking to a near two-month low of $1.2636 on June 9th 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 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 was 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 per cent on Friday. It 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 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.” – Reuters