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Sterling takes back seat to dollar ahead of Fed

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Ritvik Carvalho
·2-min read
FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna
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By Ritvik Carvalho

LONDON (Reuters) - Sterling edged lower to the dollar on Wednesday as the greenback strengthened across the board ahead of the Federal Reserve's policy decision due later in the day.

The dollar's strength is likely to be transitory, analysts said, as the U.S. central bank is widely expected to maintain its policy settings and Fed Chairman Jerome Powell is seen as likely to repeat his dovish message.

Federal Open Market Committee projections https://fingfx.thomsonreuters.com/gfx/mkt/xegpbxgbjpq/Pasted%20image%201619510880234.png

The pound has traded in a sideways pattern against the dollar and euro for the past couple of weeks, driven largely by moves in the dollar, as analysts wait to see the impact of Britain gradually reopening its economy.

Political noise around Britain's ruling conservative party has left the currency largely unaffected, although it has reacted positively on signs that the economy is rebounding. Still, even as the market remains positioned on balance for gains in the currency, analysts say a lot of good news has been priced in.

Sterling positioning https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkbnlwpm/Pasted%20image%201619424671982.png

By 1150 GMT, sterling was 0.3% lower against the dollar at $1.3875. It was 0.1% lower to the euro at 86.99 pence.

"The pound has been quite unaffected by the political noise in the UK, remaining broadly supported against both the euro and the dollar this week," said Francesco Pesole, G10 FX strategist at ING.

"A bearish-dollar outcome of the Fed meeting today should provide an extra tailwind for cable to make another attempt at the $1.40 level later this week."

Elsewhere, banks were starting to quantify the probability of a Scottish independence referendum as elections in Scotland draw closer.

There is a 35% chance Scotland will leave the United Kingdom in the next 10 years, Citi said in a research note.

Morgan Stanley analysts said there was a 15% chance that Scotland will leave the United Kingdom, as Britain holds regional and local elections next week with Scotland's dominant Scottish National Party hoping for a mandate for independence.

However, they put the earliest plausible date for independence as Jan. 1, 2025, given the time it would take to stage a new referendum and negotiate a separation.

Betting markets show a below 5% chance for an independence vote this year.

Betting markets see low chance of Scottish independence vote in 2021 https://graphics.reuters.com/BRITAIN-STERLING/xklvyynaovg/chart.png

(Reporting by Ritvik Carvalho; Editing by Giles Elgood and Amy Caren Daniel)