* 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 (Updates prices and adds comment)
LONDON, Aug 30 (Reuters) - Sterling rebounded from 11-month lows to gain over half a percent versus the euro on Wednesday on speculation the European Central Bank might not tolerate a strengthening single currency for too long.
The pound has fallen more than 3 percent versus the euro this month and is set for its fourth consecutive month of losses. It slid to 93 pence per euro for the time since early October on Tuesday.
But amidst broad selling of the euro on Wednesday, sterling recouped some losses to trade 0.7 percent higher at 92.05 pence per euro.
It was 0.1 percent higher against the dollar at $1.2932.
“It’s the overextended nature of the long euro trade - you’re seeing record levels of positivity on the euro against sterling,” said Martin Arnold, FX strategist at ETF Securities.
“That’s not necessarily warranted by the stance of the central bank, and as we come into the next ECB meeting, the market will start to get a handle on how cautious the ECB is likely to be (given the high level of the euro).”
Investors also had their eye on the third round of Brexit negotiations which started on Monday, with the European Union’s chief negotiator saying he was concerned at the slow progress of the talks.
The British government has laid out a series of position papers that have outlined compromises over some of the issues likely to block progress in talks this year, but EU officials say Britain needs to settle its divorce bill with the bloc before a trade agreement can be discussed.
Morgan Stanley strategists said sterling will likely weaken further against the euro until October’s British party conference season when investors will be watching for any disagreements internally within the ruling Conservative party.
On a trade-weighted basis, sterling was trading at 74.9, recovering from its lowest levels since November 2016.
While market analysts say sterling remains among the most undervalued currencies on a trade-weighted basis among its major rivals, the uncertainty around Brexit negotiations and the toll it is taking on the broader economy has discouraged investors from buying sterling-denominated assets.
“We are staying away from sterling for now as it remains a headline driven currency even though on a valuation basis it looks attractive,” said Thomas Flury, global head of currency strategy at UBS Group AG. (Reporting by Saikat Chatterjee; Editing by Toby Chopra and Hugh Lawson)
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