June 26, 2017 / 11:21 AM / 3 months ago

UPDATE 2-Sterling inches higher as UK PM May strikes deal with DUP

* 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 (Adds fresh comments, background)

By Ritvik Carvalho

LONDON, June 26 (Reuters) - Sterling gained 0.1-0.2 percent against the dollar and euro on Monday after Prime Minister Theresa May struck a deal to prop up her minority government, peeling away one layer of uncertainty for Britain as its negotiates its exit from the European Union.

May secured the backing of Northern Ireland’s Democratic Unionist Party (DUP) and its 10 lawmakers, concluding two weeks of talks since she lost her majority in an election on June 8.

The pound hit a one-week high against the dollar of $1.2759 in morning London trade in anticipation of the deal, before briefly turning negative an hour before the announcement.

After news broke of the deal being finalised, sterling reclaimed lost ground and last traded 0.1 percent higher at $1.2735.

It was also 0.1 percent higher at 87.97 pence per euro.

“There wasn’t really an expectation for it (the deal) to fall apart,” said Christopher Beauchamp, markets analyst at IG Markets, explaining the move. “In rather heavily trailed events, it (sterling) always tends to see that kind of unimpressed reaction.”

Sterling has recovered more than a cent of its losses since the election as investors have upped their expectations for a rise in record low interest rates in Britain.

More Bank of England policymakers than forecast voted for a hike at its last policy meeting, and its chief economist said last week that he expected to vote for a hike later this year.

However, economic data in the coming weeks was likely to stay the Bank’s hand on rates, said ING currency strategist Viraj Patel.

“We’re a bit less optimistic and think the data will continue on a slowing path ahead of the August meeting where the bank may stick to the status quo and all these hawkish expectations fade away,” he said.

Patel’s comments chimed with those of strategists’ at UBS, who argued Britain’s current account was likely to be a greater driver for sterling in the medium-term versus the BoE’s shifting stance towards rates.

“Improvements in the income balance have been mostly driven by global asset reflation and not recent sterling weakness. If these improvements stick, then the downside for the pound may be less than what we thought before, other things equal,” they wrote in a note.

“But equally, if they don‘t, then even more sterling weakness is likely required for the current account to revert to more sustainable levels.”

Data on first-quarter economic output, a consumer confidence survey, business investment numbers and a reading of Britain’s current account are all due later this week. (Editing by Robin Pomeroy and Pritha Sarkar)

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