December 12, 2017 / 9:12 AM / 8 months ago

Hedge funds add wary sterling bets before EU summit

LONDON (Reuters) - Sterling steadied on Monday after posting its biggest daily drop in more than a month on Friday, with investors cautiously adding some long bets at the start of a week when Britain and the EU will sign off on a deal to move to the next stage of Brexit talks.

Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Latest positioning data showed hedge funds added to long sterling bets for a third consecutive week, in a potentially busy week for the British currency. A central bank meeting is scheduled for Thursday and a raft of top-tier data including for retail sales, inflation and jobs are also due this week.

Sentiment on sterling has improved slightly and investors have become a tad more hopeful for the short term, though trading has remained choppy since Prime Minister Theresa May managed to break the Brexit deadlock on Friday.

Some strategists like Peter Chatwell, head of euro rates strategy at Mizuho, said sterling’s moves reflected a lower likelihood of a disorderly Brexit rather than prospects of stronger growth or tighter monetary policy, which will depend a lot on any transition period and future trade deal.

British government bond prices rose strongly on Monday, reversing a fall on Friday as investors assessed the challenge for the government as it moves into the second phase of the Brexit negotiations.

The spread between 10-year British and German government bond yields was down about six basis points on the day, a three-week low. But a lot of the future trend in sterling will depend on a key central bank meeting later this week.

Some analysts such as Viraj Patel, an FX strategist at ING in London, say the central bank decision this week will be closely watched to see whether policymakers will acknowledge the developments in the Brexit negotiations.

“While we suspect the statement will be largely unchanged, it’ll be interesting to see whether the monetary policy committee explicitly acknowledges the recent Brexit progress,” said ING’s Patel.

“If so, one could see this as a hawkish development – with risks that sterling moves up to 1.3500/50.”

Sterling weakened slightly against the dollar GBP=D3 to $1.3360 after shedding 0.7 percent on Friday, its biggest daily drop since Nov. 2. Sterling had skidded when cautious investors booked profits after a sharp rally in previous days.

Against the euro, EURGBP=D3 sterling weakened by 0.4 percent to 88.31 pence in early trade on Monday.

Reporting by Saikat Chatterjee; Additional reporting by David Milliken; Editing by Gareth Jones

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