Sterling edges up ahead of UK Brexit blueprint

LONDON (Reuters) - The pound rose on Thursday as traders bet that a Brexit white paper policy document could help restart negotiations on trade between the European Union and Britain for when it leaves the bloc next March.

British Prime Minister Theresa May will set out a blueprint on Thursday putting at its core a plan for a free trade area for goods that her government has called “principled and practical” but which has angered many in her party.

Foreign Secretary Boris Johnson and Brexit minister David Davis on Monday quit in protest at the plan stirring talk of a leadership challenge and sending sterling tumbling more than a cent.

But a favourable response from the EU’s Brexit negotiator Michel Barnier to Thursday’s blueprint could lift the pound.

“We see a good chance of Brussels accepting this document as the basis for restarting Brexit negotiations ... resulting in a period of out-performance for the pound,” said analysts at MUFG.

If the EU shuns the paper, however, sterling could fall below $1.30 as risks of a ‘no deal’ Brexit pick-up, said ING FX strategist Viraj Patel.

Britain’s newly appointed Brexit minister said on Thursday he hoped the government’s policy on leaving the European Union will reassure those in the EU who are unclear as to how it will work.

A sluggish economy and a strong dollar have weakened sterling - the currency has suffered its worst quarter versus the dollar since the 2016 Brexit vote - but it has been creeping higher recently.

Tentative signs of a recovery in Britain’s economy have lifted expectations of an August interest rate hike to more than 60 percent from less than 50 percent two weeks ago.

With Brexit once again plunging the government into disarray this week has been particularly choppy for the pound.

“So far sterling has moved from elated (no hard Brexit) to rock bottom (new government crisis likely),” Antje Praefcke, a currency strategist at Commerzbank in Frankfurt, said in a note.

At 0900 GMT sterling was up 0.2 percent at $1.3216, up from a three-day low of $1.3189 hit on Monday after Boris Johnson’s resignation.

Against the euro, sterling traded flat on the day at 88.41 pence per euro.

Traders are preparing for more British economic data next week that, if better than forecast, may heighten expectations of a Bank of England interest rate rise.

Reporting by Tom Finn; Editing by Janet Lawrence