* 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 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
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
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
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
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
"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)