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Sterling climbed from a 5-1/2-year-low against the dollar on Monday, taking a breather from a brutal sell-off that has seen it emerge as one of the worst performing major currencies in the New Year as investors pushed back chances of a rate hike. Uncertainty stemming from a referendum on whether Britain will stay in the European Union or not was also souring sentiment and is likely to keep gains capped. Latest data shows, speculators have been adding to unfavourable bets against the pound, which posted its seventh straight week of losses against the euro on Friday.
Sterling was up 0.4 percent at $1.4570, having fallen to $1.4491 in early Asian trade, a level not seen since June 2010, with the pound losing nearly 5 percent in the last month against the dollar. Against the euro, the pound hit a 11-month low of 75.55 pence per euro in Asian trade, before recovering to trade at 74.72 pence in European deals. The pound posted its worst run of weekly losses in almost five years against the euro last week.
Spotlight is on this week's Bank of England monetary policy meeting and minutes to be released soon after. The minutes are expected to repeat December's dovish message, with soft oil prices keeping inflation weak and wage growth rather subdued. Traders said there is a slight risk that the sole member in the nine-member committee who has voted to raise interest rates in the past could change his vote, a move which would weigh on sterling.
"The (minutes) gives us the opportunity to get additional insights about members' views on the UK economic outlook and future decisions, especially with the "Brexit" referendum looming and sterling testing its lowest levels since June 2010," said Sakis Paraskevov, senior analyst at IronFX Global. Investors had until the start of last week been expecting a BoE rate hike by the end of 2016, but those bets have all but collapsed. Expectations of a rate hike have now been pushed back to early 2017.
A poor run of sentiment surveys have underlined fears over Britain's broader economic outlook at a time when the debate over a possible British exit from the European Union gathering steam. A number of banks are recommending selling the pound in the near term given the risk of the destabilising referendum. Morgan Stanley was the latest to recommended investors to buy the euro against the pound because of the referendum. They said declining risk appetite, falling commodity prices and declining rate hike expectations were also playing a role in dragging sterling lower. As a result, they expect the euro to rise to 78.50 pence.

Copyright Reuters, 2016

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