November 10, 2016 / 9:56 AM / 3 years ago

Sterling inches higher as dealers weigh Trump fallout

LONDON (Reuters) - Sterling gained ground against both the dollar and the euro on Thursday as markets sifted through the potential global implications of Donald Trump’s surprise victory in the U.S. presidential election.

U.S. dollar and British pound notes are seen in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration

The pound’s troubles have been the main currency story on developed markets since June and the dominant view among banks and investors remains that it will fall further in the months ahead.

But the uncertainty generated by Trump’s victory after a campaign that included a wide range of potentially disruptive policy pledges - from building a wall with Mexico to declaring China a currency manipulator - threatens to provide a different set of impulses over the next few months.

A number of banks have now said they expect the dollar to strengthen next year on the back of higher U.S. yields and inflation, which would put more pressure on the pound’s dollar value as London starts formal talks on an exit from the European Union.

If Trump’s victory foreshadows more victories for populist politicians in Europe next year, that may also give Britain more cover from the politically-driven selling that has hurt sterling since the Brexit vote in June.

“Trump in the White House will help the pound,” said Derek Halpenny, European Head of Global Market Research with Bank of Tokyo-Mitsubishi UFJ in London.

“The UK Brexit vote will no longer be viewed as some kind of outlier vote but perhaps the beginning of a global shift towards more populist voting. The fall in the euro should then be viewed as a sign of a shift of the political risk premium from the UK to Europe.”

Sterling was 0.1 percent higher against both the euro and dollar in morning trade in London. It traded at $1.2424 and 87.79 pence per euro respectively.

Data on Wednesday showing Britain’s trade deficit with the rest of the world narrowed in the three months to September, a sign that the collapse in sterling may be starting to have an impact on one of Britain’s big weaknesses.

All indicators, however, show investors are still betting massively on sterling weakness. Positioning readings showed short positions close to their highest on record.

“I think the market is going through a period as it did after Brexit. We have the initial reaction and then doubt over whether he (Trump) will do all the things he said he would do,” said Dominic Bunning, a strategist with HSBC in London.

“Structurally, we remain fairly bearish on the pound. We have $1.20 for the end of the year and $1.10 for the end of next year. We’re feeling pretty comfortable with those at the moment.”

Editing by Kevin Liffey

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