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Sterling holds ground despite Brexit risks and economic woes

Sterling holds ground despite Brexit risks and economic woes 1

By Lucy Raitano

LONDON (Reuters) – The British pound ticked higher against the dollar on Tuesday and was stable against the euro, even amid flaring Brexit-related risks and a murky economic backdrop.

After flattish early trading, by 0846 GMT the currency was up 0.16% versus the dollar at $1.22850, and 0.06% lower against the euro at 86.215 pence.

Monday saw British Prime Minister Boris Johnson pressing on with plans to pass legislation through parliament this year to scrap some of the rules on post-Brexit trade with Northern Ireland.

“For now sterling is little changed. If the bill passes its current form it would clearly lead to significant deterioration relations with our major trading partner and it would be a large drag on sterling,” said Colin Asher, senior economist at Mizuho.

But the bill still has to pass through the House of Lords, so any potential drag on the currency is still some distance in the future, Asher said.

Attention instead remains on the UK economic backdrop, which saw inflation hit a 40-year record of 9.1% last month, the highest level of the G7 countries.

Traders will be listening closely to the Bank of England governor Andrew Bailey who is due to speak Wednesday at the European Central Bank Forum on Central Banking 2022.

Meanwhile a poll by U.S. bank Citi and pollsters YouGov showed the British public’s expectations for inflation in future years receding this month to their lowest level since January.

But analysts say that inflation in the UK has yet to peak and some expect bigger rate hikes of 50 bps by the Bank of England in the summer.

“It’s better to do too much and unwind next year than not do enough in the near term as their inflation fighting credentials are being questioned,” said Asher.

Aggressive rate hikes are also expected from the Fed, but the U.S. central bank is expected to pause hikes towards the end of the year, and the resulting narrowing interest rate spreads should support sterling, he said.

(Reporting by Lucy Raitano; Editing by Raissa Kasolowsky)

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