Sterling edges higher; UK jobs data caps gains

LONDON: Sterling edged higher on Tuesday, lifted by broad dollar weakness, though gains were capped by data on slowing British pay growth and overnight Brexit headlines.

With overall sterling bets leaning towards a net short compared with a large long position in April, traders grew wary of selling sterling aggressively at current levels.

"Sterling moves have been quite muted despite the overnight negative headlines, and that may be because overall net positions in the market are quite small," said John Marley, an independent foreign exchange strategist.

The British pound rose 0.1 percent to $1.3251 as the dollar weakened against the euro and the Swiss franc.

Sterling hit a post-Brexit referendum high of $1.4377 in mid-April but tanked more than 9 percent since then to an eight-month low of 1.3078 in late June. It has recovered somewhat but remains well below 2018 highs.

However, pressure came in the form of data showing that British workers' average weekly earnings rose by 2.5 percent on the year in the three months to May, slowing from the 2.6 percent growth in the previous three-month period.

Overnight Brexit headlines also kept a lid on gains. A series of votes in parliament exposed the growing rift within Prime Minister Theresa May's Conservative Party over a Brexit roadmap.

By accepting demands of hardline Brexit campaigners, she exposed her vulnerability in parliament, where both wings of her party attacked each other, highlighting deep divisions that have hampered progress in talks with the European Union.

With less than nine months until the UK leaves the EU and a deal determining what happens to its future relationship needing to be signed well before that, the latest vote in parliament is seen by markets as a fresh headwind for sterling.

"We believe the risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing, and this puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy," UBS strategist John Wraith said in a note.

Sterling has struggled to capitalise in recent weeks on signs that the economy is improving and upbeat comments from Bank of England policymakers because of mounting uncertainty over whether Britain can secure a trade deal with the EU before March.

Market expectations have shifted in favour of an interest rate increase next month, with implied probability nearing 80 percent compared with less than 50 percent in early June. HSBC became the latest bank to change its call, arguing for an August increase.

"It is a negative development for sure and that can be reflected in where the pound is trading currently or the latest data would have pushed sterling comfortably higher than these levels," said Lee Hardman, an FX strategist at MUFG in London.

Derivative markets also appear to be reflecting the increased caution on sterling's outlook, with both one  and three-month risk reversals plummeting to near 2018 lows.