Sterling rebounds after hitting 16-month low

By Samuel Indyk

LONDON (Reuters) - The British pound eked out gains against the U.S. dollar on Monday, recovering after falling to a 16-month low, as tentative hopes for progress in talks between Russia and Ukraine dampened demand for U.S. currency and other safe assets.

The market was also looking to policy announcements from the Bank of England and U.S. Federal Reserve later this week.

Remarks from Ukrainian and Russian officials that progress in diplomatic talks could be established in the coming days helped the pound's recovery, according to Rabobank.

"This has led to a modest reduction in demand for safe haven assets and allowed cable to pull away from its earlier lows," Rabobank said.

Sterling fell to as low as $1.3013 against the dollar, its lowest level since November 2020, before paring losses to trade 0.2% higher at $1.3061.

Against the euro, sterling was down 0.3% at 83.99 pence.

Both the BoE and Fed are seen raising their main interest rates by 25 basis points at their respective meetings this week.

Money markets are currently pricing in 163 basis points of monetary tightening from the Bank of England this year, equivalent to at least six 25 basis point rate increases.

ING thinks the market pricing is too aggressive but doesn't see the central bank scaling back market expectations for rate rises this week as it might favour a stronger pound.

"Thursday may be too soon for the BoE to manage tightening expectations substantially lower," ING said.

"We say this because UK CPI looks set to push up towards the 8% year-on-year area in April and the BoE probably prefers a strong pound to try to alleviate some of the pressure from imported energy prices," the Dutch bank added.

(Reporting by Samuel Indyk; Editing by Gareth Jones and Susan Fenton)