Sterling falls to three-week low against yen, struggles vs dollar

LONDON (Reuters) - Sterling fell to a three-week low against a resurgent yen on Monday after the Japanese currency received a boost from reports that the central bank was contemplating scaling back its stimulus.

FILE PHOTO: A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The British currency also struggled against the dollar, failing to hold on to earlier gains that had lifted the pound further away from sub-$1.30 10-month lows last week.

After rebounding on Friday as the greenback was undermined by U.S. President Donald Trump’s comments lamenting the dollar’s recent strength, sterling slipped as much as 0.2 percent to $1.3103.

“The pound is fairly mixed on the whole with an early foray higher against the U.S. dollar being met with some resistance around the $1.3150 level,” said David Cheetham, an analyst at online trading firm XTB.

Against the yen, which has firmed across the board since the Bank of Japan reports, the pound slipped 0.6 percent to 145.8 yen, the lowest since July 3.

The Bank of Japan, facing stubbornly low inflation, is in unusually active discussions before this month’s policy decision, with changes to its interest-rate targets and stock-buying techniques on the table, people familiar with the central bank’s thinking told Reuters.

Sterling looks set for more volatility, especially if there are signs that support for a “hard” Brexit - crashing out of the European Union without a trade deal in place - is gaining ground.

A weekend poll revealed Britons were overwhelmingly opposed to Prime Minister Theresa May’s recently unveiled Brexit plan and would instead support a new right-wing political party committed to a complete break from the bloc.

Markets are now awaiting Brussels’s response.

Michel Barnier, the chief EU negotiator, said Britain’s proposals on its future relationship with the EU contained constructive elements but many questions remained.

The British parliament starts its summer recess this week and markets are now awaiting next week’s Bank of England meeting to see if the bank decides to raise rates.

Markets currently assign a roughly 70 percent chance of a rate increase despite weaker-than-expected retail sales and softer inflation data published last week.

“The pound continues to remain on the defensive, although there is at least some relief that an immediate leadership challenge to PM May appears unlikely before the parliamentary summer recess,” MUFJ analysts said in a note to clients.

“It leaves the upcoming BoE policy meeting on 2nd August as the main event for the pound over the holiday period.”

Against the euro, sterling initially rose before trading 0.1 percent lower at 89.315 pence at 0230 GMT. Last week the pound touched four-month lows of 89.58 pence per euro.

Reporting by Sujata Rao and Tommy Wilkes; Editing by Mark Heinrich