June 19, 2017 / 9:46 AM / a year ago

Sterling inches up ahead of start of Brexit talks

* 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 Jemima Kelly

LONDON, June 19 (Reuters) - Sterling edged up against the dollar on Monday, with traders cautious as Britain formally began negotiations to leave the European Union and domestic political uncertainty dented appetite for the currency.

Data released by the Commodity Futures Trading Commission on Friday showed speculators took bets against the pound to the highest since early May in the week up to last Tuesday, amid political turmoil in Britain after no party managed to win a parliamentary majority in the June 8 election.

And although sterling climbed sharply on Thursday after it emerged that the Bank of England’s monetary policy committee had seen a 5-3 split on whether to raise interest rates immediately on the back of rapidly increasing domestic consumer prices, the pound did not manage to hold onto those gains.

“There’s a general wariness of sterling,” said Societe Generale currency strategist Alvin Tan. “Despite the BoE’s surprise 5-3 vote we saw last week, it hasn’t been able to gain traction. The political situation is dominating.”

Brexit Secretary David Davis on Monday morning began negotiations in Brussels that will set Britain’s terms for leaving the EU.

The pound has fallen over 15 percent since in the year since the referendum vote for Brexit, hit by worries that Brexit will damage the economy if foreign investment dries up, and that political uncertainty will dominate.

Prime Minister Theresa May, whose Conservative party lost its majority in parliament on June 8, is now trying to form a minority government with the Northern Irish Democratic Unionist Party. But investors are worried that even when that deal is finalised, it will not make for a stable political environment.

Sterling inched up 0.2 percent on Monday to $1.2803 and to 87.45 pence per euro, after posting a modest rise last week against both currencies.

Commerzbank analysts wrote in a note to clients that the fact Brexit talks were “finally starting” should be temporarily sterling-positive and “a step in the right direction”.

But they said the talks were likely to reveal either very different negotiating positions or - worse - that Britain has no clear strategy.

“We have to consider this asymmetry: the Europeans can afford to enter into the negotiations without a strategy. They have presented their Brexit bill to the UK and that is that,” they wrote. “But Downing Street is likely to be busy navel gazing, (with the) prime minister in a precarious position following the election disaster and the (Grenfell Tower block) fire catastrophe.

“(We) fear that it will become clear pretty quickly just how difficult these negotiations will become. And that is when the real high-risk period for sterling starts.” (Editing by Mark Heinrich)

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