February 3, 2017 / 9:15 AM / 8 months ago

Sterling steadies after worst fall since October

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Patrick Graham

LONDON, Feb 3 (Reuters) - The pound steadied in early trade on Friday after a Bank of England message on policy provoked its worst daily performance in trade-weighted terms in almost four months.

Sterling has gained almost 3 percent since Prime Minister Theresa May laid out the government’s vision for divorce from the EU in a speech just over two weeks ago, but its 1.3 percent fall against a basket of currencies on Thursday was the worst since October.

The fall came on the back of a Bank of England quarterly inflation report that upped growth forecasts but declined to do the same on inflation and pointed to interest rates staying on hold long into next year.

“UK data has been robust and price pressures are building, but it was surely too early for markets to expect a significantly more hawkish narrative (from the bank),” analysts from Bank of America Merrill Lynch said in a morning note.

“A benign interpretation of the Brexit process and strong UK data had perhaps lulled the sterling market into a false sense of near-term security.”

Sterling traded at $1.2531 in morning trade in London, down 1 percent from levels seen before the Bank of England’s statement on Thursday but above an overnight low of $1.2510.

It was marginally firmer at 85.80 pence per euro , with traders saying there had been little fallout from media reports of a new legal hurdle to the government’s plan to take Britain out of the single market.

One new cautionary note on the economy came from data showing the number of new homes built in London fell 6 percent last year while an indicator of future supply dropped by a third.

The gains for sterling this month have come courtesy of a resilient economy and seem largely to reflect investors cashing in the big negative bets taken on the pound after Britain voted to leave the European Union last June.

That has provoked a number of major banks to call for the pound to recover to around $1.30 in the months ahead, even if most admit such forecasts are heavily exposed to the political noise surrounding talks due to be launched by late March.

“The BoE action yesterday will limit upside pound risks for now but further out the resilience of the UK economy will be one of the factors that will help sterling advance to $1.30,” said Derek Halpenny, European head of global market research with Japan’s MUFG.

“If the economy continues to exceed expectations like it has done since Brexit, the BoE will find it increasingly hard to justify maintaining what is essentially an emergency monetary stance triggered by Brexit.” (Editing by Kevin Liffey)

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