Sterling holds gains as risk appetite picks up

Sterling held onto the bullish gains of the past 24 hours on Friday, an improvement in global appetite for risk providing support for the currency along with signs of progress on changes to Britain's pact with the European Union. The pound has fallen more than 6 percent since November on the back of a retreat on expectations of higher UK interest rates and nerves over what polls suggest may be a closely fought referendum this year over a "Brexit" from the EU.
Sources close to the negotiations with Brussels told Reuters on Thursday the EU was offering Britain an "emergency brake" rule on benefits that could help curb immigration from other EU states as part of a reform package before the vote. That should give Prime Minister David Cameron more political capital with which to fight for a vote to stay in. The pound rose almost 1 percent on Thursday and was another 0.2 percent higher against the euro at 75.96 pence on Friday.
"It's one of the things that we've spoken about that should we see some progress in the negotiations, then that is likely to be very positive for sterling," said Barclays strategist Hamish Pepper. "The idea of the euro correcting lower against sterling on these kind of reports seems reasonable, but for the moment I would say that today and yesterday's moves are really more about the improvement in global sentiment."
The Brexit debate, and the collapse of expectations of a rise in Bank of England base rates this year, have made the pound among the most susceptible to the grim mood that has gripped stock and commodity markets since the start of 2016. That tone was brighter on Friday thanks to the Bank of Japan's shock announcement overnight that it would move to negative interest rates in aid of stimulating its way out of a vicious circle of low growth and low inflation.
Against the dollar sterling was broadly flat at $1.4353, almost 3 cents above lows hit a week ago. "I think the story is fairly positive at the moment," said a currency analyst with another large European bank in London. "The currency is tracking risk at the moment, so the boost from the BOJ overnight and equity markets has been solid and we expect the US to come in with the same kind of sentiment."