Sterling bounces back on PM appointment
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Sterling bounces back on PM appointment

Euro, Hong Kong dollar, US dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot on Jan 21, 2016. (Reuters photo)
Euro, Hong Kong dollar, US dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot on Jan 21, 2016. (Reuters photo)

LONDON - Sterling rose along with UK government bond yields on Tuesday as the early anointing of interior minister Theresa May as prime minister fed into a generally improved global mood among financial investors.

The 1.5% rise to $1.3186 put the pound on track for its biggest daily gain since Britain's June 23 vote to leave the European Union drove it to 31-year lows.

It also strengthened 1% to 84.22 pence per euro , a one-week high, extending gains made on Monday after the withdrawal of leading Brexit campaigner Andrea Leadsom cleared the way for May's formal appointment this week.

"Clarity on the UK's leadership was another factor boosting investors' appetite," said Hussein Sayed, chief market strategist with retail brokerage FXTM.

"However, the big question remains as to when Article 50 is going to be triggered, and how investors are going to react to the UK's official departure from the EU. Meaning that investors shouldn't get overexcited."

This week's main economic event is a Bank of England policy meeting on Thursday which many analysts and investors expect will yield a cut in interest rates to shield the economy from the immediate shock of the Brexit vote.

While 10-year British government bond yields rose four basis points to 0.80%, two-year yields rose by just over one basis point, held down by the expectations of lower official rates.

The pound extended its gains as BoE governor Mark Carney, two days before the rate decision, told a parliamentary committee that he wanted to make it as clear as possible to households and firms that credit was available.

"We expect the BoE to deliver at least a 0.25-percentage-point reduction in their key policy rate at this week's meeting and to signal that more easing is likely when they meet again in August," said Lee Hardman, currency analyst with Bank of Tokyo-Mitsubishi UFJ in London.

"The weak performance of the UK economy and expectations of looser monetary policy from the BoE should keep the pound under downward pressure in the coming months."

While Mrs May is seen as a steadier hand than Mrs Leadsom to lead Britain into Brexit talks with Europe, some of her stated positions only underline the tensions that have most market analysts predicting weaker UK growth and a weaker pound.

"She has a clear history at least in terms of rhetoric of holding a tough line over wanting to reduce immigration," said Mr Hardman. "That points towards potentially difficult negotiations with the EU and more limited access to the single market for the UK."

Officials from the world's largest asset manager, BlackRock, said on Tuesday that Britain would fall into recession over the coming year and growth in each of the next five years would be at least 0.5 percentage points lower as a result of Brexit.

"Recession is now our base case," the company's chief investment strategist, Richard Turnill, said. "There's likely to be a significant reduction of investment in the UK."

He expected sterling to fall further as the BoE cuts interest rates to zero and expands its bond-buying programme, but not as far as parity with the dollar.

The pound hit a 31-year low of $1.2798 a week ago.

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