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UPDATE 2-Sterling at highest since December 2019 versus weaker dollar

Tue, 18th Aug 2020 12:07

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
(Updates prices)

By Elizabeth Howcroft

LONDON, Aug 18 (Reuters) - The pound hit 8-month highs
versus the dollar on Tuesday, driven by weakness in the U.S.
currency, but analysts were cautious about the outlook for
sterling as a new round of Brexit talks began, with
euro-sterling still firmly above 90 pence per euro.

The dollar index hit new two-year lows on Tuesday, facing
the triple woes of diminishing yields, weak U.S. economic data
and decreasing demand for safe havens.

Meanwhile, traders are braced for renewed sterling
volatility as talks between Britain and the European Union
restarted.

"Sterling's recent good performance and resilience to grim
economic data has likely relied on the Brexit story being put on
the backburner by investors," wrote ING strategists Chris
Turner, Francesco Pesole and Petr Krpata.

"We see a non-negligible risk of markets starting to price
back in a no-deal outcome," they added.

Britain left the EU in January and is in a transition period
during which the country remains in the bloc's single market and
customs union. The transition period will finish at the end of
2020 whether or not a trade deal has been reached.

At 1435 GMT, the pound was at $1.3220, up 0.9% since New
York's close. As the dollar weakened sterling hit
$1.3276, its strongest since the last day of 2019.

Versus the euro, it was up around 0.3% but still above the
key 90 pence per euro level, at 90.3.

Analysts say the impact of dollar weakness on the
pound-dollar pairing masks sterling's true weakness, with the
effect of Brexit-related headlines more likely to be visible in
euro-sterling.

But euro-sterling has been stuck in a narrow range: after
monthly moves of more than 2% in February, March, April and May,
the monthly change was less than 1% in June and July.

The options market suggests investor nervousness, with risk
reversals, the difference between call and put option demand,
showing investors still prefer options to sell the pound -
although less than in March .

Prime Minister Boris Johnson's spokesman said on Monday that
Britain still believes a deal can be reached in September.

The trade negotiations are scheduled for up to Oct. 2, less
than a fortnight before an EU summit. The EU has said
negotiators must seal any deal by October to allow for
ratification by the bloc's 27 nations.

Jefferies analysts wrote in a note to clients that an
improving net savings balance, possible good news on Brexit and
the Bank of England's quantitative easing could help the pound.

(Reporting by Elizabeth Howcroft; editing by Ed Osmond, Kirsten
Donovan and Barbara Lewis)

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