Sterling edged down against the dollar on Monday, with demand for the currency weakened by uncertainty over domestic politics and over Britain's economic future, as formal Brexit negotiations got under way. Britain and the European Union's chief negotiators began talks by stressing the need to quickly tackle uncertainties in the process and underlining their constructive attitude to reach a deal that is good for all.
The EU's Michel Barnier said he hoped the talks - starting almost a year to the day after a British referendum vote to leave the EU - would establish a timetable for the negotiations. Britain's Brexit minister, David Davis, said the UK wanted a "new, deep and special partnership" with the EU after it leaves, and that he would conduct the talks in a constructive tone.
Currency traders, though, seemed unimpressed. Sterling ticked gently lower throughout the day against the dollar, trading down around 0.2 percent at $1.2753 by 1455 GMT, having opened the day slightly higher. That left it almost 2.5 percent lower than an eight-month high hit in May on the view that Prime Minister Theresa May's Conservative party would increase its majority in elections on June 8, giving Britain a strong position to negotiate with the EU from.
"With political instability in Westminster placing the UK in a vulnerable position and Conservatives in a weaker position following the election, the outcome of the Brexit talks may heavily depend on what Europe wants," said FXTM analyst Lukman Otunuga. "Although the prospect of a soft Brexit has the ability to support sterling, I feel the currency remains vulnerable to further downside amid the confusion and ongoing uncertainty that Brexit presents."
Data released by the Commodity Futures Trading Commission on Friday showed speculators took bets against the pound to the highest since early May in the week up to last Tuesday, after no party managed to win a parliamentary majority in the election.
Against the euro, the pound was flat at 87.60 pence. The Bank of England, which provided sterling with a small boost last week when three members of its policy committee voted to raise interest rates, on Monday named Silvana Tenreyro, a trade-focused London School of Economics academic, as the newest member of its rate-setting committee. She will replace Kristin Hawkes - one of those who voted in favour of a hike last week.
"In general of the view relative to the hawkish person she is replacing (Forbes) and the view that new members do not usually jump straight into a bias, we would assume a slight swing to a more dovish vote," wrote Nomura market analysts in a note to clients.