April 25, 2017 / 4:01 PM / 6 months ago

UPDATE 1-Sterling hits 2-week low against resurgent euro

* Graphic: Sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Recasts with fall to 2-week low)

By Ritvik Carvalho and Patrick Graham

LONDON, April 25 (Reuters) - Sterling sank to a two-week low against the euro on Tuesday, hit by the single currency’s renewed strength as relieved investors turned optimistic on Europe after the first round of the French presidential election.

The pound weakened to as much as 85.27 pence per euro after a Reuters report that European Central Bank officials may now feel free to begin to tweak its policy language in June toward a tighter monetary stance.

That follows a 1.4 percent surge for the single currency against the pound, its biggest gain since early January, after a run-off vote between two strongly anti-EU candidates was averted in Sunday’s first round of voting.

Expectations that centrist Emmanuel Macron will easily beat far-rightist Marine Le Pen in the second round on May 7 have fuelled a relief rally in the EU’s shared currency.

“It is mainly euro sterling that is moving things today,” said Stephen Gallo, a strategist with Bank of Montreal. “The moves on euro dollar have also dragged cable (dollar exchange rates) up a bit.”

By 1540 GMT, sterling was down 0.3 percent at 85.19 pence per euro while gaining 0.3 percent to $1.2836

Sterling surged almost 2 percent to hit four-month highs versus the euro after British Prime Minister Theresa May called a snap election last week.

Investors expect her Conservatives to win by a landslide, giving her a clear domestic mandate that may increase her room for manoeuvre as Britain heads into exit negotiations with the European Union.

Sterling has largely stalled, however, since the initial moves on May’s announcement and positioning data still points to a large market bias against the pound built up in a shattering few months after last June’s Brexit referendum.

EU leaders will warn Britain it cannot assume its big financial services industry will be included in any free trade deal after Brexit, diplomats said on Monday after fixing negotiating terms in a draft document.

“The pound’s euphoric rally on last week’s snap election news could be at further risk if the market loses confidence in the election’s ability to make for easier negotiations with the EU,” analysts from currencies exchange LMAX said.

“The probability of Macron as the next president in France is also not doing any favors for the pound, with the candidate a well known critic of the UK leaving the EU.”

In a week sparse on economic data, the major events from here are likely to be Thursday’s ECB policy decision and news conference and UK first-quarter growth numbers on Friday.

Retail sales and other measures of consumer sentiment have pointed to a weakening in an economy that has so far ridden out the threats generated by the Brexit vote relatively robustly.

But a number of analysts have spoken in favour of sterling in the past few weeks, some also emboldened by the election to suggest the worst may be over.

“Our view stands that a lot of the move lower has now happened,” said Lee Hardman, a strategist with Japan’s MUFG in London. “Any move below 1.20 looks more of a stretch now and that may ultimately be the bottom for this cycle.” (Editing by Mark Trevelyan)

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