By Ritvik Carvalho
LONDON (Reuters) - Sterling recovered against the dollar to hit its highest in over a week on Tuesday, in a sudden move that came at just around the time at which daily foreign exchange benchmarks are calculated.
The pound has been particularly sensitive to risk sentiment in recent weeks and has correlated well with the performance of global stock markets. So an equity selloff, led by Chinese technology stocks, had put the pound under pressure, sending it to as low as $1.3778, or 0.3% weaker.
However, it suddenly popped higher at around 1500 GMT in London - the time at which daily foreign exchange benchmarks are calculated. It then traded 0.5% higher at $1.3891 - its highest since July 15.
It firmed a touch versus the euro at 85.22 pence, also its highest level since July 15.
Analysts said the recovery was at odds with risk sentiment as stocks on Wall Street were still trading in the red. [.N]
"It's a bit of an odd one because it hasn't been accompanied by a recovery in risk appetite," said Michael Brown, senior market analyst at CaxtonFX.
"Looks to have been a fairly large amount of sterling demand, mixed with chunky dollar selling, into the 4 p.m. fixing which has driven the turnaround."
One explanation offered for the move was month-end portfolio rebalancing flows.
"We are moving towards month end, with (the) current sterling settlement date set for 29th July which may imply across the board USD sales," said Neil Jones, head of FX sales, financial institutions at Mizuho Bank. "My sense is the current move may well be flow, rather than event, driven."
Besides the two-day U.S. Federal Reserve meeting beginning later on Tuesday, pound traders are also looking for direction from the Bank of England meeting next week.
BoE interest-rate setter Gertjan Vlieghe said on Monday the central bank should not scale back stimulus possibly until well into 2022, because a recent uptick in inflation is likely to be temporary and COVID-19 remains a threat to the economy.
Elsewhere in economic news, British retailers reported only a slight slowdown in July after sales growth hit its highest in almost three years in June, the first full month after non-essential shops reopened from a coronavirus shutdown, data showed.
The Confederation of British Industry's measure of the volume of sales compared with a year earlier dipped to +23 from June's +25, which was the highest since August 2018. Economists polled by Reuters had mostly expected a fall to +21.
UK retail sales dip slightly in July after post-lockdown jump https://fingfx.thomsonreuters.com/gfx/mkt/myvmnmakdpr/Pasted%20image%201627397137742.png
Receding COVID-19 cases in Britain have kept sterling supported against the dollar. Data on Monday showed new COVID-19 cases in Britain had fallen for five consecutive days.
ING strategists told clients that euro-sterling appears to have closed "a meaningful part" of its "prior misvaluation" and is close to what it said was short-term fair value of 85 pence.
Speculators went net short on the pound for the first time since December 2020 in the week up to last Tuesday, CFTC data showed on Friday.
(Reporting by Ritvik Carvalho; Editing by Emelia Sithole-Matarise and Susan Fenton)