Sterling stepped back from a seven-year high against a trade-weighted basket of currencies on Monday as some investors put money back into the euro on hopes of a deal over Greece. The pound was one of the refuges investors found earlier this year when they fled a weakening euro or the low yields most euro zone government bonds offered.
The euro has done better over the past couple of months as German yields surged, and signs that a deal might be made to resolve Greece's immediate financing problems were helping the euro on Monday. "The feeling this afternoon is that the prospect of a deal on Greece have sapped a bit of the safety bid out of sterling," said Tobias Davis, corporate hedging manager with Western Union in London. "As we lean into the rest of the week, it does seem like Greece will continue to be the major driver."
Sterling slipped a third of a percent to $1.5820, having hit a seven-month high of $1.5930 last Thursday. It was almost 0.8 percent weaker against the euro at 72.05 pence. Some said the euro was unlikely to go much higher. "Euro/sterling has limited upside potential above 72 pence this week, even in the event of a Greek breakthrough," said Stephen Gallo, currency strategist at BMO. "We expect an eventual move below 70 pence but think another month of strong UK wage and price data will be required to justify it."
Euro zone finance ministers left a meeting with Greek officials in Brussels voicing optimism over Greece's latest proposals. National leaders were to hold an emergency summit on Monday evening, but officials made clear they would not negotiate details of the programme, only agree on a timetable for a deal. Against a trade-weighted basket, sterling was at 92.7, having hit a peak of 93.4, its highest since July 2008. British gilt prices fell, tracking German Bunds as the hopes of a Greek deal sparked a sell-off in safe-haven assets like high-rated government bonds.
At 1427 GMT, the 10-year gilt yield was up 10 basis points on the day at 2.11 percent, having earlier touched its highest level since June 11 at 2.113 percent, still more than 1.2 percentage points above the German equivalents. After robust UK data last week, investors are factoring in the chance that the Bank of England will start raising rates in nine months, having priced that for around a year before Wednesday's wages numbers.
Some analysts, however, question whether an appreciating currency and tighter financial conditions could make it hard for the BoE to raise interest rates any time soon. "There is still political risk from Brexit scenarios, but we judge this to be quite low," Citi analysts said in a note, adding that although the UK economy was outperforming, the BoE was unlikely to raise rates aggressively.