Sterling slips as speculators cut positions and dollar rallies

LONDON (Reuters) - Sterling slipped on Tuesday as investors continued to trim their pound holdings before a Bank of England meeting on Thursday, when the central bank is expected to keep interest rates on hold, and as worries about Brexit negotiations resurface.

The pound, which has fallen heavily in recent weeks on expectations the BoE would not, as earlier believed, tighten monetary policy because of a relatively weak economy, fell 0.4 percent to $1.3503 versus the dollar.

Sterling is off the low of $1.3487 it hit on Friday, which had erased all of the 2018 gains for what had been one of the best performing G10 currencies, but downward selling pressure remains.

Positioning data released late last week shows investors have cut their net long positions in the pound over the past fortnight by the biggest amount since March 2017, although net long positions remain near a four-year high.

David Madden, analyst at CMC Markets, said the collapse in expectations for a BoE hike when it meets on Thursday, from a 80 or 90 percent chance a month ago to around 10 percent today, was the primary reason for sterling’s weakness.

“It has all happened at a time when the dollar index is hitting multi-month highs,” he said. “Expectations were probably too high that the BoE was going to raise rates.”

Against the euro, sterling fell 0.1 percent to 88.065 pence.

Tensions within Britain’s governing Conservative party over how to agree terms of exit from the European Union have also re-emerged as a key political risk for the pound.

Prime Minister Theresa May faces a tough battle as her party attempts to steer flagship legislation through Britain’s upper house of parliament.

Her foreign minister, Boris Johnson, has described as “crazy” a proposed customs partnership that is believed to be May’s preferred option for relations with the EU after Britain leaves the bloc, underlining deep divisions within her top team about future ties with the EU.

ING analysts said in a note that while the focus would be on the passage of Brexit legislation, sterling against the euro remained steady for now.

Reporting by Tommy Wilkes; Editing by Jon Boyle