Sterling rebounds after recent selloff, awaits US data

By Stefano Rebaudo

(Reuters) -Sterling was on track for a second straight session of gains against both the dollar and the euro on Monday, as investors paused after two weeks of losses fuelled by concerns over the UK's economic and fiscal outlook.

The dollar dropped on Monday amid concerns over a potential government shutdown, as investors await a batch of U.S. economic releases that could offer further clues on the Federal Reserve's policy path. 

Analysts said a surprise jump in UK public borrowing unveiled this month and signs of slowing momentum in both the manufacturing and services sectors were key factors weighing on sentiment.

Sterling rose 0.26% to $1.3434 on Friday, trimming some of the past two weeks' 1.15% losses. Over the same period, the U.S. dollar index, which tracks the greenback against a basket of major currencies, fell around 0.6%.

"There will be a lot of focus on the Labour Party conference, which kicks off in Liverpool today,” said Chris Turner, head of forex strategy at ING, saying UK growth and "parlous" public finances were weighing on the British currency.

"Any signs that the government will cede ground to the left wing of the party by, say, withdrawing the two-child cap on benefits would be taken poorly by Gilts and sterling,” he added.

Yields on 30-year UK government bonds dropped on Monday after hitting 5.583% on Friday, a three-week high. They had reached 5.752% in early September, the highest since the late 1990s.

British finance minister Rachel Reeves told the BBC ahead of her speech at the governing Labour Party's conference on Monday that tough choices would be needed to stick to her fiscal rules.

MUFG sees scope for the Bank of England to cut interest rates in December as the economy slows and inflation subsides.

Markets were pricing in a 25 basis-point BoE rate cut by April 2026 and around a 25% chance of such a move in December. They also indicated 39 bps of easing by the end of next year.

BoE interest-rate setter Swati Dhingra said Britain's high inflation rate is likely to ease off, and the central bank should move more quickly to cut borrowing costs. 

The euro dropped 0.15% to 87.16 pence, its lowest since September 22.

Traders expected the European Central Bank to keep rates higher for longer and priced in a depo rate of around 1.95%, flat from current levels, at the end of 2026 from the current 2%.

(Reporting by Stefano Rebaudo; Editing by Jan Harvey)