Sterling firms as May offers scrutiny on Brexit, dollar buoyant

[October 12, 2016]  By Anirban Nag

LONDON (Reuters) - The struggling pound rose on Wednesday following a brutal sell-off, as British Prime Minister Theresa May's offer to give lawmakers some scrutiny of the process to leave the European Union calmed market fears of a "hard Brexit".

Those fears - that Britain will give up full access to the EU's single market - pushed sterling to 31-year lows last week, including on Friday when it lost 10 percent within minutes.

A court will rule on Thursday whether May can trigger Article 50, initiating the process of separating Britain from the European Union, without the consent of parliament. A spokeswoman for May said there will be no vote in Britain's parliament on triggering the formal Brexit talks.

Many lawmakers seem to favor a "soft Brexit" or no Brexit at all and investors fear the "hard" option could hurt trade and foreign investment needed to fund Britain's huge current account deficit, one of the biggest in the developed world.

Sterling was up 1.2 percent at $1.2270 <GBP=D4>, after having tumbled to $1.2086 on Tuesday when it appeared it was heading back towards a 31-year low of $1.1450 hit on Friday. The euro too was down 1.5 percent at 80.97 pence <EURGBP=D4>

"After weeks of tough rhetoric pushing sterling into a trading environment closer to an emerging market currency, the government may aim to stabilize markets, with its rhetoric and suggestions now possibly shifting in tone," Morgan Stanley's head of currency strategy, Hans Redeker, said.

"However, there is a fine line to walk as May's Conservative Party wants a clean split from Europe. In addition, giving in too much, even before Article 50 negotiations have started, shifts the negotiation advantage towards the EU. Hence, the pound's rebound should be limited and followed by a decline."

Elsewhere, the dollar index, which tracks the greenback against a basket of six major currencies, hit a 7-month high of 97.817, its highest since early March. The euro was trading down at $1.1015, an 11-week low, while against the yen, it was slightly higher at 103.55

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo

The dollar had been on an uptrend on rising expectations that the U.S. Federal Reserve would raise interest rates as early as this year, with markets pricing in about a 70-percent chance of a hike in December.

Investors await the minutes of the Federal Reserve Open Market Committee's September meeting, scheduled to be released later on Wednesday, as well as U.S. retail sales data on Friday.

"Since the market is still not fully priced for a December rate hike, it seems reasonable to assume that the dollar may still have some upside potential between now and year end," Rabobank said in a note.

"However, we expect that this will be limited by the perception that the pace of Fed tightening is likely to remain slow."

(Editing by Louise Ireland)

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