Sterling snaps 3-day rising streak versus dollar, awaits inflation data

By Stefano Rebaudo

(Reuters) -Sterling snapped a three-day winning streak against the dollar and fell versus the euro on Monday, as concerns over the British economy weighed on sentiment.

Economists expect Wednesday's UK services inflation data to undershoot the Bank of England's projection, with a mild bearish impact on the pound. 

“That (inflation data) can modestly move the needle to the dovish side in the British swap curve and weigh on the pound this week,” ING forex strategist Francesco Pesole said.

Sterling dropped 0.10% to $1.3427. It hit $1.3471 on Friday, its highest level in almost two weeks.

The greenback edged up against the yen but was flat versus the euro on Monday as investors shifted their focus to political developments in Japan and the euro area, while lingering concerns about U.S. credit risks kept weighing on sentiment.

Last week’s UK jobs data prompted some analysts to argue that ongoing disinflation and signs of labour market loosening could contribute to an erosion of sterling’s valuation relative to the euro.

However, renewed concerns about a potential trade war between the U.S. and China weighed on the single currency and affected market expectations for the European Central Bank rate outlook, leading traders to almost fully price in an additional ECB easing move by next summer.

The British currency dropped 0.10% versus the single currency to 86.85 pence. It was at 86.75 pence early last week. On Tuesday last week, after jobs data, the euro recorded its biggest daily rise against the pound in more than four weeks.

Short-dated British government bond yields fell sharply as markets priced more chances of BoE rate cuts, weighing on the British currency

Yields on 2-year gilts dropped 2.5 bps to 3.86%. They hit 3.81% last week, their lowest levels in 2-1/2 months on Friday.

Gilt outperformance recently paused and will probably require further disinflationary momentum from this week's key economic data while investors await the November budget, analysts said.

(Editing by Andrew Heavens)