Sterling held its ground against the dollar after a volatile opening on Tuesday, with concerns about a tax deal that prompted heavy sales of some UK stocks weighing on a currency still 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.
"People put this morning's move down to the price action around tax inversion-related stocks but I wouldn't really expect this to be a long-term driver for sterling," said Josh O'Byrne, a strategist with Citi in London. "The dollar is still doing pretty well and that is the biggest factor at the moment." The US Treasury Department has announced new rules reducing the tax benefits for companies which strike tax "inversion" deals, denting the take-over appeal of UK companies for US suitors.
Drugmaker Shire, which is being acquired by AbbVie's ABBV.N, tumbled 6.5 percent in response. AstraZeneca, which turned down a bid from Pfizer PFE this year, fell 5 percent and medical devices manufacturer Smith & Nephew Plc SN.L, also tipped as a US bid target, shed 3.8 percent. Sterling traded roughly steady in late trade in London at $1.6369. 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 less than 0.1 percent. "We're bit more hawkish than the market (on interest rates) at the moment and think that sterling should still do well against the euro going forward," O'Byrne said. "But it may take more UK data to bring us back to those fundamentals."
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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