February 27, 2018 / 9:26 AM / a year ago

Sterling stumbles after Powell's comments boost dollar

LONDON (Reuters) - Sterling fell on Tuesday, reversing earlier gains, after Federal Reserve chief Jerome Powell’s comments that the central bank would stick to gradual rate rises boosted the dollar.

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

With expectations of a May rate hike by the Bank of England mostly priced into financial markets, the dollar’s fortunes have been the dominant driver in recent sterling price action, with investors also wary of Brexit-related headlines.

“Everything is taking a bit of a breather today with the strength in the dollar,” said Jeremy Cook, Head of FX Strategy at WorldFirst.

“Sterling has spent a lot of time above $1.40 ... It is being supported by the (interest) rate considerations but as soon as we get above $1.40 it tends to get sold.”

Sterling fell 0.6 percent to as low as $1.3891, its lowest since Feb. 22, having traded higher against the dollar before Powell’s comments to U.S. lawmakers were published. The dollar rose 0.3 percent against a basket of currencies.

Against the euro, sterling was also down 0.2 percent at 88.36 pence per euro.

Powell’s Congressional testimony, which began at 1500 GMT and followed a statement of his comments on the U.S. economy, is his first public appearance since being sworn in as Fed chair earlier this month.

Traders will watch closely to see whether the new chief will continue on the gradual monetary rate path pursued by his predecessor Janet Yellen, or whether he will take a more hawkish approach.

“While the pound’s outlook has improved in recent days thanks to the renewed optimism from the central bank, investors are wary of pushing the British currency higher from these levels unless there is more clarity on the dollar’s outlook,” said Lee Hardman, a currency strategist at MUFG.

Sterling remains considerably below a pre-Brexit referendum high of $1.4346 hit late last month.

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

Recent Brexit-related headlines have added to the general uncertainty around sterling.

Monday’s 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, offered the pound some respite.

But Prime Minister Theresa May has ruled out any customs union with the EU after Brexit because it would prevent Britain from striking new trade deals. May will give a key speech on Brexit later this week.

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

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