Sterling edged higher for a second consecutive session on Wednesday as the U.S. dollar weakened after Democrats took the lead in runoff votes that will determine control of the U.S. Senate.
Market watchers believe a Democrat-controlled Senate would help economic growth globally and thus most riskier assets, but drag down bonds and the dollar as the U.S. budget and trade deficits would be likely to grow.
In early London trading, the British pound edged 0.1% higher to $1.3638 versus a struggling dollar, close to a May 2018 high of $1.37 tested on Monday. Against the euro, the pound was steady at 90.36 pence.
“With the market’s medium to long-term view still pointing towards the `back to normal’ trade, downside on the pound should be limited, especially as positioning is very neutral,” Jordan Rochester, a strategist at Nomura said.
For now, though, markets remain cautious on the pound’s outlook.
The expected damage to the economy from a new national lockdown announced this week raised expectations the Bank of England will announce more policy easing.
Money markets now expect the central bank to take benchmark interest rates into negative territory as early as May, compared with an August estimate just after the Brexit deal was struck.
And while bullish pound bets have registered a fourth consecutive week of gains, according to weekly positioning data the size of the gains in the latest week is far smaller than in previous weeks.
Reporting by Saikat Chatterjee; editing by Larry King