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Sterling rises as dollar weakens; Brexit talks in focus

LONDON (Reuters) - Sterling rose 0.4% on Tuesday afternoon on a weak U.S. dollar, while rising hopes of a trade deal between the European Union and Britain helped the currency strengthen against the euro.

FILE PHOTO: Queen Elizabeth II is seen with printed medical masks on the Pound banknotes in this illustration taken, March 31, 2020. REUTERS/Dado Ruvic/Illustration

For most of the day, the British pound traded flat against the dollar and euro as most traders focused on the ongoing Brexit negotiations.

European Union chief negotiator Michel Barnier resumed talks in London with his British counterpart on Tuesday as the two sides tried to strike a last-minute trade agreement less than 10 weeks before the United Kingdom leaves the bloc.

Sterling did not budge earlier Tuesday after Britain’s retail recovery, a bright spot in the COVID-hit economy, came to a halt this month following several months of improvement, an industry survey showed on Tuesday.

Analysts believe sterling will not rise by much even if Britain and the European Union clinch a Brexit trade deal in time.

“We are becoming increasingly confident that the lift the pound would derive from a Brexit deal being confirmed is likely to be modest,” said Derek Halpenny, head of research at MUFG.

“Yesterday was a good example of some good news failing to provide much lift at all for sterling.”

The British pound was last up 0.4% against the dollar at $1.3067 and edged up 0.2% versus the euro to 90.55 pence. The U.S. dollar index was down 0.3% at 92.79.

Britain is also grappling with a weak economy battered by the coronavirus. Negative interest rates have not been ruled out, another hurdle the currency can ill afford.

The Bank of England is weighing how it could cut rates below zero if needed, and views differ among its nine monetary policymakers.

Two-year and five-year British government bond yields were in negative territory on Tuesday.

On top of that, Britain’s darkening economic outlook looks set to push the Bank of England into ramping up its huge bond-buying stimulus programme next week for the third time since the onset of the coronavirus pandemic.

All that creates a discouraging outlook for sterling, Halpenny said.

“We have no example of negative rates in a country running a current account deficit, a budget deficit that is larger than most other major advanced economies and where inflation is by no means low,” he said. “It certainly points to potential for a greater currency impact.”

Reporting by Olga Cotaga; Editing by Richard Chang

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