Sterling edges higher after strong survey data

LONDON - 4 January 2018: Sterling edged up on Thursday after surveys showed Britain’s dominant services sector rebounded strongly last month, although investors remained reluctant to push the British currency much higher after its recent rally.

The pound also benefited from broad-based dollar weakness and a general rebound in risk appetite, which has lifted sentiment towards the British currency.

Persistent structural factors, such as a widening current account deficit, have kept investors wary, however.

“Looking at positioning data, inflation and a big current account deficit, sterling looks to be more of a sell than a buy at these levels,” said Hans Redeker, global head of currency strategy at Morgan Stanley based in London.

Sterling rose 0.3 higher at $1.3551 and remained within striking distance of a four-month high of $1.3659 hit in late September.

Long bets on sterling are hovering near their biggest levels in more than three years, according to the latest positioning data.

Some analysts said that the pound’s failure to move any higher after the survey findings suggested the pound’s recent strong showing may have been a little overdone.

“There could a pullback ahead given the fact that the recent gains were largely unsupported by any fundamental developments,” said David Cheetham, market analyst at XTB.

Britain’s dominant services sector grew unexpectedly quickly last month and businesses are more upbeat about 2018 than they were for much of 2017, but Brexit is weighing on investment plans, a survey showed on Thursday.

A near 3 percent rally in sterling since a landmark European Union summit last month that moved Brexit talks to the next stage has made some investors more optimistic on the currency’s outlook in the coming weeks.

“Sterling held up well, and we have a window of ‘Brexitless’ trading until March and the resumption of talks while it also seems that support for a second referendum is starting to grow, especially in the parliamentary parties,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

The pound last year recorded its best annual performance against the dollar since 2009, with an almost 10 percent rise amid broad dollar weakness. But it is still around 10 percent down against the dollar since the vote for Brexit.

Against the euro, sterling is still more than 15 percent below its 2016 Brexit referendum day low.