Sterling rises as Sunak prepares to become PM, euro awaits ECB hike

Sterling rose on Tuesday supported by improved risk sentiment as Rishi Sunak prepared to become Britain's prime minister, while the euro steadied ahead of an expected rate hike by the European Central Bank (ECB) on Thursday.

The U.S. dollar edged up but was not far from its lowest level in October amid signs Federal Reserve rate hikes are slowing the world's biggest economy.

Sunak will become Britain's next prime minister, Downing Street said on Monday. Sunak was due to meet King Charles on Tuesday morning before speaking outside No. 10 Downing Street.

British government bonds recovered further and the 20-year gilt returned to a level last seen on Sept. 23, the day former Prime Minister Liz Truss's economic agenda triggered a collapse in sterling assets.

Sterling edged toward this month's highs, up 0.3% to $1.13125 at 0825 GMT but currency strategists expected the currency, down more than 16% against the dollar this year, to remain under pressure.

"The UK macro backdrop remains challenging. The inbox of the PM is overflowing with problems," said Jeremy Stretch, head of G10 FX strategy at CIBC.

"Should the current level of UK political noise ease we would be wary of sterling continuing to cheapen versus both the U.S. dollar and euro".

The euro edged 0.07% lower at $0.9866, but was not far from its highest level since early October as the ECB looks set to hike rates by 75 basis points on Thursday aiming to rein in red-hot inflation.

The dollar index, which measures the currency against six major peers, edged up 0.13% to 112.00.

"Structurally there's still a lot to like about the U.S. dollar, but we're in a mean-reversion, sideways, choppy market at the moment," said Chris Weston, head of research at Pepperstone in Melbourne.

"I still think the dollar is the most beautiful currency to own in the G-10."

The greenback had softened on Monday after S&P flash PMI data showed U.S. business activity contracting for a fourth straight month in October, the latest evidence of an economy slowing in the face of high inflation and rising interest rates.

Economists polled by Reuters expect the pace of rate increases to slow to 50 basis points in December, matching bets in money markets.

YEN AND YUAN

The yen held firm around 149 per dollar following suspected Bank of Japan (BOJ) intervention on Friday and Monday.

A retreat this week in long-term Treasury yields also helped support the Japanese currency, but the policy background for yen weakness is likely to be put into stark relief in coming days: the BOJ is expected to stick to monetary stimulus on Friday, while the Fed is likely to raise rates by another 75 basis points on Wednesday of next week.

At 148.89 yen, the dollar was down from a 32-year high of 151.94 on Friday which appeared to trigger successive bouts of BOJ intervention.

The Ministry of Finance declined to comment on whether it had ordered intervention in recent days, though it did confirm intervention in September, which was the first yen-buying foray since 1998 by Japanese authorities.

China's currency extended the weakness seen since Chinese leader Xi Jinping's choice of leadership team at the twice-a-decade Communist Party Congress raised fears growth will be sacrificed for ideology-driven policies.

The onshore yuan slid to a near 15-year low on Tuesday after the central bank set the lowest mid-point since 2008. The offshore yuan dipped to a record low of 7.3650 per dollar.