March 5, 2018 / 6:38 PM / a year ago

Sterling climbs on transition deal hopes

* Graphic: World FX rates in 2018

* Graphic: Trade-weighted sterling since Brexit vote

By Tommy Wilkes and Jemima Kelly

LONDON, March 5 (Reuters) - Sterling hit a five-day high against the dollar on Monday and also climbed against the euro, after Bloomberg reported that British Prime Minister Theresa May had said she was close to securing a transition deal with the European Union.

Sterling climbed to as high as $1.3877 after the report was published, its highest since Feb. 28 and up half a percent on the day.

Against the euro, the pound strengthened by a third of a percent to 88.85 pence.

“May saying she’s close to an agreement is good for sterling,” said Mizuho’s head of hedge fund currency sales, Neil Jones.

“The market ... had sensed in the last few weeks that things had got to quite a low ebb (in Brexit negotiations) and it looked to be a virtual lock-out. So the fact that we’ve got anything at all, which does swing the pendulum back to softer Brexit, is good for sterling.”

The European Union is due to publish guidelines this week, following on from a speech on Friday in which May urged the bloc to be flexible in negotiating their future relationship.

Her comments had disappointed markets hoping for a sign that a transition deal would be clinched in the coming weeks.

Analysts say Brexit risk remains the dominant factor for the currency. That drove it to its weakest level against the euro since November on Friday.

Still, speculators added to their net long positions on the pound last week, data showed on Friday, signalling they are still betting it will rise.

The Bank of England has signalled that it could soon start raising interest rates because of relatively strong economic performance — to which a survey covering Britain’s dominant services sector will give more clues — and inflationary pressures.

But it has made it clear that rate hikes are dependent on progress in Brexit talks.

“We (have) turned neutral on sterling in the short term due to renewed political pressure on Theresa May, a rates market that was near fully agreed with our Bank of England view and an FX market that was considerably long sterling,” wrote Nomura currency strategist Jordan Rochester in a note to clients.

“But sterling’s underperformance (will) only go so far in our view,” he added. (Reporting by Tommy Wilkes Editing by Catherine Evans)

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