October 20, 2017 / 8:12 AM / a year ago

Sterling bounces back, boosted by progress in Brexit talks

LONDON (Reuters) - Sterling bounced back from an eight-day low against the euro on Friday, with investors hopeful of a breakthrough in Brexit negotiations after British Prime Minister Theresa May won a modest reprieve in stalled talks with the European Union.

Pound coins are seen in this photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

EU leaders said at a summit in Brussels that they would begin preparations to move into the second phase of Brexit talks in December, a step forward that would allow London to discuss its future trade relationship with the bloc.

May said EU leaders need not be concerned about the current budget plans, that Britain would honour the commitments it had already made as a member of the bloc and that she was optimistic about winning a good Brexit deal.

The pound strengthened to 89.355 pence per euro, having earlier dipped to its weakest since Oct. 12. That left it up 0.8 percent on the day.

“The pound has been given a (boost)... by optimistic comments from Prime Minister Theresa May following her meeting with the EU-27,” said Craig Erlam, analyst at OANDA.

“May’s acknowledgement that the UK will honour its financial commitments to the EU while claiming her counterparts will consider a vision for a future partnership is a small step forward in negotiations that has seemingly failed to be achieved in discussions between David Davis and Michel Barnier.”

Against a stronger dollar, the pound recovered from a two-week low, trading up 0.3 percent on the day at $1.3199.

For the week, though, it was down around 0.6 percent, having been pushed lower by a combination of weak data and comments from BoE policymakers that markets have interpreted as dovish.

“UK yields have fallen back as traders mull the possibility that the Bank of England might step back from a rate rise in November given some of this week’s data,” said CMC Markets analyst Michael Hewson.

Although investors are still largely expecting a 25 basis-point interest rate hike will come at the Bank of England’s next policy meeting on Nov. 2, doubts are growing about future rate rises.

Retail sales volumes, a key component of the economy, fell 0.8 percent in September, dragging quarterly growth to its weakest annual rate since 2013, data showed on Thursday, raising concerns that the economy was too weak to stomach a rate hike, which would be the first since 2007.

The next major data point for the pound will be UK GDP numbers due on Wednesday.

Reporting by Fanny Potkin and Polina Ivanova; Editing by Jemima Kelly and Toby Chopra

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