May 8, 2017 / 8:16 AM / 8 months ago

Sterling stuck below $1.30 as traders eye Bank of England meeting

LONDON (Reuters) - A short relief rally on the French election result was not enough to drive sterling past $1.30 on Monday, with the British currency trading in tight ranges as attention focused on this week’s Bank of England meeting and a domestic election campaign.

The pound has gained more than 3 percent against the dollar since Prime Minister Theresa May three weeks ago called a surprise early national vote for June 8, reflecting hopes among investors it will give her a stronger hand to compromise in Brexit talks.

Yet that recovery has stalled in the past week, even as May’s Conservatives won a decisive victory in local council elections on Thursday.

That hints at the scale of doubts that remain on how the UK economy will deal with a historic break from Europe and what are widely expected to be volatile talks on the terms, whatever the outcome of next month’s election.

“There is no reason for the pound to really gain at the moment, because every time it does you have to stop and say that the risks ahead are still tremendous,” said Esther Reichelt, a strategist with Commerzbank in Frankfurt.

“If you look at pricing, the market is remarkably calm with regard to the election. That ignores that a lot of the risk is with the EU and that it may be hard for May to achieve a lot of what she is promising.”

By 1600 GMT, the pound traded down a third of a percent at $1.2939, having hit a high of $1.2990 for the first time in seven months in early trading in Asia.

It gained 0.4 percent to 84.45 pence per euro as an overnight burst for the single currency after Emmanuel Macron’s expected win in the French presidential election faded, in what analysts said was a classic “buy the rumour, sell the fact” move.

The Bank of England meets on Thursday to discuss policy and issue its quarterly inflation report.

The Bank surprised markets earlier this year by delivering a hawkish message on the chances of rises in interest rates, generally read as reflecting concern that further falls for pound would boost inflation and weaken consumer spending power.

With the currency stronger, it should feel freer to let forecasts for inflation over the next two years drift above its 2 percent target without taking away some of the emergency monetary support it has put in place for growth, analysts said.

“With several pieces of ‘soft’ data showing a fair degree of confidence in the economy, Governor Carney may take this opportunity to err on the hawkish side, which could see the pound add to recent gains and move back above the $1.30 handle,” said David Cheetham, chief market analyst at XTB.

Editing by Toby Chopra

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