Sterling firms with focus on defence plan, weaker dollar

By Johann M Cherian

(Reuters) -Sterling had a firm start to the week on Monday, as investors assessed a domestic defence plan and a batch of better-than-expected British economic data, while simmering trade tensions between the U.S. and China eroded appetite for the dollar.

The mood among investors generally was sour, after U.S. President Donald Trump said on Friday he planned to double duties on imported steel and aluminium to 50% from this Wednesday, and as Beijing hit back against accusations it violated an agreement on critical mineral shipments. [MKTS/GLOB]

The pound rose 0.53% to $1.3531 by 1056 GMT, largely as a function of the dollar's broad decline against a range of currencies. Against the euro, sterling was virtually flat at 84.37 pence.

In the UK, investors weighed the impact that the latest effort to expand its defence systems could have on public spending, with a defence review expected to be published on Monday.

"Fiscal constraints will... limit how much the UK can invest into its defence arsenal – prompting questions around the sustainability of the government's fiscal framework," Deutsche Bank senior economist Sanjay Raja said.

"A potentially bigger role for the UK in European defence and security will require larger incentives from the EU vis-à-vis a refined trade deal."

Concerns are that Prime Minister Keir Starmer's government could cause fiscal debt levels to balloon as defence spending rises, at a time when investors have been demanding a higher rate of returns from longer-dated developed market debt. Yields on benchmark 10-year gilts were little changed on the day around 4.67%.

On the data front, markets were relieved that a survey showed that the downturn in British manufacturing was less steep than first feared in May.

Separately, UK house prices in May were 3.5% higher than a year earlier, monthly data from mortgage lender Nationwide showed, helped by buyers that sought to complete transactions before the end of a partial exemption on purchase taxes.

While upbeat consumer demand against a broader cloudy economic outlook globally have aided appetite for UK assets, signs of persistent price pressures have been a concern and led investors now to price in just a little more than one more 25 basis point interest rate cut by the Bank of England this year.

Comments from policymaker Catherine Mann later in the day could shed more light on the central bank's policy outlook.

The pound is trading close to more than three-year highs it hit last month as investors viewed the UK economy as better insulated from trade threats, while U.S.-dollar denominated assets have declined.

(Reporting by Johann M Cherian in Bengaluru; Editing by Amanda Cooper and Bernadette Baum)