LONDON: Sterling traded roughly steady against the dollar after a volatile opening on Monday, with concerns about a tax deal that prompted heavy sales of some UK stocks weighing on a currency recovering from two weeks of political turbulence.
The pound has struggled to bounce since Scotland relieved investors by voting to stick with its union with England in a referendum last week that had been seen as too close to call.
Dealers and analysts say the overall tone remains more measured than over a two-month period which had seen sterling drop more than 6 percent against the dollar. The prospect of further monetary easing in the euro zone, in contrast to expected rises in UK interest rates, will support the pound against the euro, they say, but the outlook against the dollar is more mixed.
"There's been some pretty heavy price action this morning," said Graham Davidson, a spot currency dealer with NAB in London. "There is talk of the tax inversion issue that is hurting some UK stocks making takeovers less likely. Largely it may be positioning - a lot of people sold (sterling) into the spike after the referendum and they may be getting squeezed."
The US Treasury Department has announced new rules reducing the tax benefits for companies which strike tax "inversion" deals, denting the takeover appeal of companies such as Shire and AstaZeneca for US suitors. Sterling was down 0.1 percent to $1.6354 by 0920 GMT, having fallen almost a whole cent to as low as $1.6303.
That was around 3 cents higher than the 10-month low hit in the run-up to last week's referendum, but more than 2 cents below the high hit as the results came in. Against the euro, it was down a third of a percent, suffering from a recovery for the single currency against the dollar.
British public sector borrowing data made little impact on the market, but mortgage approvals numbers from the British Bankers' Association added to signs that the housing market, a worry for policymakers over the past year, was cooling off. Rising house prices have been one factor fuelling expectations of a rise in official Bank of England interest rates but new rules have made it harder to borrow and many Britons are already priced out of the market.
That would add to the suspicion that an economic upturn is not quite as durable and broad-based as some have previously believed, and a number of banks have pushed back expectations for rises in rates to next spring.
"The UK is largely bereft of major event risks this week, a welcome respite after last week's Scottish referendum anxiety," said Kit Juckes, a strategist with French bank Societe Generale in London.
"Short GBP/USD still makes sense. As with the euro, short-covering rallies (in the pound) have been tiny and longer term economic growth prospects are no longer as bright as they were."
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