July 17, 2018 / 8:51 AM / 4 months ago

Sterling settles near 8-month lows as Brexit uncertainty weighs

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, July 17 (Reuters) - Sterling held near eight-month lows on Tuesday after a series of votes in parliament exposed the growing rift within Prime Minister Theresa May’s Conservative Party over a Brexit roadmap.

By accepting the demands of hardline Brexit campaigners, she exposed her vulnerability in parliament, where both wings of her Conservative Party attacked each other, highlighting the deep divisions that have so far hampered progress in talks with the European Union.

With less than nine months to go until the UK leaves the EU and a deal determining what happens to its future relationship needing to be signed well before that, the latest vote in parliament is seen by markets as a fresh headwind for sterling.

“We believe the risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing, and this puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy,” John Wraith, a strategist at UBS, said in a note.

The British currency was broadly steady around $1.3255 and was flat against the euro at 88.46 cents. It hit a low of $1.3050 in late June, its weakest since last November.

Sterling has struggled to capitalize in recent weeks on signs that the economy is improving and upbeat comments from Bank of England policymakers because of mounting uncertainty over whether Britain can secure a trade deal with the EU before it leaves the bloc next March.

Market expectations have shifted considerably in favour of a rate hike next month with implied probability nearing 80 percent compared to less than 50 percent in early June. HSBC became the latest bank to change its call, arguing for a hike in August.

“It is a negative development for sure and that can be reflected in where the pound is trading currently or the latest data would have pushed sterling comfortably higher than these levels,” said Lee Hardman, an FX strategist at MUFG in London.

Derivative markets also appear to be reflecting the increased caution about sterling’s outlook with both one and three-month risk reversals plummeting to near 2018 lows. (Reporting by Saikat Chatterjee Editing by Keith Weir)

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