Sterling steady against dollar, traders digest UK-EU reset deal

By Lucy Raitano

(Reuters) -The pound held steady against the dollar on Tuesday but stayed close to a near three-week high hit on Monday after Britain agreed a major trade and defence reset with the European Union.

At 1138 GMT, the pound was flat against the dollar at $1.33640, having earlier risen around 0.25%.

The pound hit $1.34030 on Monday, its highest level since April 30.

"Yesterday’s big news in terms of the new UK-EU deal was a mild positive for sterling, although we don’t think it moves the needle substantially on growth given the relatively small size of the animal livestock and border crossing arrangements that have been made," said Chris Turner, head of FX strategy at ING.

The dollar slipped again on Tuesday as traders focused on the U.S. economy and considered news that upcoming U.S.-Japan talks could include discussions on foreign exchange and avoiding volatility.

Markets are also digesting comments from Bank of England Chief Economist Huw Pill who said on Tuesday that the BoE's pace of interest rate cuts had been too fast.

Pill flagged still strong wage pressures on inflation, but said his vote this month to keep borrowing costs on hold was likely to prove "a skip" not a halt.

"In the G10 space, interest rates are quite supportive for the UK because Bank of England policy is more aligned with Fed policy than it is with ECB policy so that's helping sterling," said ING's Turner.

The hawkish tone from Pill is also relatively supportive, he said.

The BoE cut the bank rate by 0.25 percentage points to 4.25% on May 8 and traders are betting it will deliver another 25 bps cut at its next meeting in June.

After upbeat GDP data last week boosted the pound, traders are now looking ahead to UK consumer price index readings due on Wednesday.

The pound was flat against the euro at 0.8415.

(Reporting by Lucy Raitano; Editing by Emelia Sithole-Matarise)