LONDON, July 6 (Reuters) - Sterling climbed against the dollar and euro on Monday after Greek voters emphatically rejected terms of a rescue package, boosting safe-haven flows into Britain’s currency and making a 2015 U.S. Federal Reserve rate hike less likely.
The euro showed little sense of panic selling, amid expectations the European Central Bank would take action to stabilize the market if necessary and hold emergency funding to Greek banks at the same level as last week.
But the common currency, which edged up from lows after the resignation of Greek Finance Minister Yanis Varoufakis, was still a sell on rallies, traders said.
The euro was down half a percent on the day at 71.005 pence , having fallen to a low of 70.57 pence in early trading in Asia. It was still well above last Monday’s low of 69.88 pence, its weakest versus sterling in nearly eight years.
“Euro/sterling has been a popular cross during the Greek crisis. There is a lot of unpredictability on how things will pan out and a lot of noise about whether there will be any debt relief or not for Greece,” said Chris Turner, head of currency strategy at ING.
“In any case, euro/sterling is a sell as the ECB will keep rates anchored and we expect it to fall below 70 pence.”
Against the dollar, sterling edged up 0.2 percent to $1.5596 .
Adam Myers, European head of FX strategy at Credit Agricole, said what was driving sterling against the dollar was expectations of when interest rate hikes from the U.S. Federal Reserve will come.
“What does the market think is going to be the Fed’s reaction given the Greek ‘No’? Does it make them more or less likely to tighten in September? At the margin it’s definitely got to be less,” said Adam Myers, European head of FX strategy at Credit Agricole in London.
“We could be in the midst of European financial contagion in the next couple of weeks’ time (and) if we were there the Fed may not tighten in September, so then the dollar goes lower. The Bank of England is probably not going to change its position, so sterling/dollar goes higher.”
The BoE meets this week and analysts at RBC Capital said it was difficult to see even those policymakers who have sought to raise rates choosing this meeting to vote in favour of a hike so soon after the budget and with Greek uncertainty still high.
Traders are also gearing up for a budget statement later this week which is likely to lead to further fiscal tightening in Britain.
British government bond prices tracked German debt sharply higher in early trading following the Greek referendum result, but later gave up their gains following an upbeat survey of U.S. business activity.
At 1530 GMT the 10-year gilt yield was up around a basis point on the day at 2.01 percent. (Additional reporting by Andy Bruce)