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Sterling heads towards five-month high versus dollar; Brexit talks begin

The pound rose on Tuesday, approaching a five-month high, driven by a weaker dollar but analysts are cautious about the outlook for the pound as a new round of Brexit talks began.

The dollar index hit new lows on Tuesday, facing the triple woes of diminishing yields, weak U.S. economic data and a lessening of demand for safe havens.

The weaker dollar pushed cable up close to its highest since March. The pound also rose against the euro.

Traders are bracing for a new round of sterling volatility as talks between Britain and the European Union restart.

“Sterling’s recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the backburner by investors,” wrote ING strategists Chris Turner, Francesco Pesole and Petr Krpata.

“We see a non-negligible risk of markets starting to price back in a no-deal outcome,” they added.

Britain left the EU in January and is in a transition period – due to end on Dec. 31 – during which the country is still in the bloc’s single market and customs union. The transition period will finish at the end of 2020 whether or not a trade deal has been reached.

At 0753 GMT, cable was at $1.3157, up 0.4% since New York’s close .

Versus the euro, it was up around 0.3% but still above the key 90 pence per euro level, at 90.36 .

Commerzbank analyst You-Na Park-Heger wrote to clients that there are limited expectations for any progress to be made in this round of negotiations.

“Should things turn out differently against all expectations Sterling would no doubt benefit and ease back below the 0.90 mark against EUR,” she wrote.

“However, we consider it to be more likely that there will be no progress, which is likely to be priced into the EUR-GBP exchange rates.”

The options market suggests investor nervousness, with risk reversals, the difference between call and put option demand, showing that investors still prefer options to sell the pound – although not as much as in March .

Prime Minister Boris Johnson’s spokesman said on Monday that Britain still believes a deal can be reached in September.

The trade negotiations are scheduled for up to Oct. 2, less than a fortnight before an EU summit. The EU has said negotiators must seal any deal by October to allow for ratification by the bloc’s 27 nations.
Source: Reuters (Reporting by Maiya Keidan, editing by Ed Osmond)

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