February 26, 2018 / 9:34 AM / in 7 months

Sterling erases gains on broad dollar rebound

LONDON (Reuters) - Sterling gave up all its earlier gains and was flat on the day thanks to a broad rebound in the dollar though hawkish comments from a central bank official boosted bets that interest rates may rise as early as May.

FILE PHOTO: U.S. Dollar and Euro notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

A speech by opposition leader Jeremy Corbyn in which he said his Labour Party wanted Britain to negotiate a new customs union with the EU to ensure tariff-free trade after Brexit also helped support the pound.

The dollar rebounded from the day’s lows against a basket of currencies and was trading near the day’s highs at 89.21 with its gains more pronounced against the euro and the yen.

“We are seeing a broad-based rebound of the dollar against the euro and there isn’t a sterling-specific factor driving this,” said a trader at a European bank in London.

Despite sterling’s retreat, sentiment remained optimistic after Dave Ramsden, a deputy governor at the Bank of England and one of the two policymakers who opposed the BoE’s decision to raise interest rates in November, said the central bank may need to raise British interest rates somewhat sooner he expected.

His comments in a newspaper interview added to the general chorus of optimism emanating from central bank officials in recent days, increasing the odds of a rate hike in May to 70 percent, according to money markets.

“The BOE’s comments have been a big driver for sterling’s gains today and while Corbyn’s comments sound optimistic, we need to see more specifics from them on what they plan to do,” said Derek Halpenny, European head of Global Markets at MUFG.

Sterling was flat on the day after having rallied as much as 0.7 percent earlier to the day's highs at $1.4070 GBP=.

As Prime Minister Theresa May tries to strike a divorce deal with the European Union by October, she is facing a rebellion by a small group of pro-Europeans inside her Conservative Party that Labour’s Corbyn hopes to use to undermine her authority.

Analysts said his support for a customs union made a “softer” Brexit — in which Britain retains ties that are as close as possible to the EU after leaving — more likely, helping reduce Brexit risks that weigh on the pound.

But “the predominant driver is the BoE comments”, said Manuel Oliveri, London-based FX strategist at Credit Agricole.

“It’s not a big surprise but this is another one of the members of the BoE (Ramsden) changing his view on the need for rate hikes.”

Increased expectations of a BOE rate hike in May come after investors took profits into a sterling rally in recent weeks.

Latest positioning data by Commodity Futures Trading Commission on Friday showed that long sterling positions are down substantially to $8.2 billion compared to more than a 3-1/2 year high of nearly $33 billion in late January.

The British pound peaked at $1.4346 in late-January, a 7.5 percent jump from early December levels. It is now more than 2.5 percent below that high.

To view a graphic on GBP Positions, click: reut.rs/2osg0xX

Reporting by Tommy Wilkes and Saikat Chatterjee; Editing by Catherine Evans

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