September 24, 2018 / 8:08 AM / 8 months ago

Sterling rebounds on Brexit hopes, but Tory conference keeps investors wary

* Graphic: World FX rates in 2018

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Sept 24 (Reuters) - The British pound bounced half a percent to above $1.31 on Monday after a big selloff in the previous session, helped by comments from Britain’s Brexit Secretary that a deal with the European Union was still possible.

Sterling tumbled two cents against the dollar on Friday, its biggest daily drop this year, after Prime Minister Theresa May said Brexit talks with the EU had reached an impasse and called for new proposals.

On Monday, the pound recouped some of its losses, rising half a percent versus the dollar to $1.3114 and 0.3 percent against the euro to 89.57 pence as some of the extreme sold positions against the pound were unwound in a week potentially filled with political headlines.

Brexit Secretary Dominic Raab said he was confident that the United Kingdom will make progress and eventually clinch a Brexit deal with the European Union.

Those comments were unlikely to support the currency for long, however, analysts said, with May’s leadership under increasing pressure ahead of a Tory part conference this week.

“An aggressive stance from the EU27 after Salzburg and the subsequent backlash from Theresa May increases the probability that a confrontation builds through the Conservative Party conference at the end of next week,” Deutsche Bank currency strategist George Saravelos wrote in a note to clients.

Friday’s selloff was a brutal reminder for investors of the currency’s vulnerability to Brexit headlines.

The pound fell to as low as $1.3053 and month implied volatility - a measure of expected price swings - jumped to its highest since February, in its biggest daily rise since January.

“An imminent agreement in the Brexit negotiations cannot be expected,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

“Under that assumption, the current levels on the options market still provide good opportunities for hedging against further exchange rate turbulence,” she said.

Many analysts still expect the two sides to reach agreement. Both Brussels and London have much to lose if Britain crashes out of the EU without an arrangement for trade on March 29, 2019.

But investors have rushed to hedge against more weakness in the currency should the negotiations with the EU collapse. (Reporting by Tom Finn, editing by Larry King)

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