Sterling falls to three-week low versus resurgent yen

LONDON (Reuters) - Sterling fell to a three-week low against a resurgent yen on Monday after the Japanese currency received a boost from reports that the central bank was contemplating scaling back its stimulus.

The British currency struggled to hold on to earlier gains against the dollar and fell 0.1 percent to $1.3115, although the pound was still up from last week’s 10-month lows below $1.30.

Sterling rebounded on Friday as the greenback was undermined by U.S. President Donald Trump’s comments lamenting the dollar’s recent strength.

Against the yen, which has firmed across the board since the Bank of Japan reports, the pound slipped 0.55 percent to 145.8 yen, the lowest since July 3.

The Bank of Japan, facing stubbornly low inflation, is in unusually active discussions before this month’s policy decision, with changes to its interest-rate targets and stock-buying techniques on the table, people familiar with the central bank’s thinking told Reuters.

Sterling looks set for more volatility however amid growing talk of a likely “hard” Brexit — crashing out of the European Union without a trade deal in place.

A weekend poll revealed Britons were overwhelmingly opposed to Prime Minister Theresa May’s Brexit plan and would instead support a new right-wing political party committed to quitting the bloc.

The UK parliament starts its summer recess this week and markets are now awaiting next week’s Bank of England meeting to see if the bank decides to raise rates.

Markets currently assign a roughly 70 percent chance of a rate increase despite weaker-than-expected retail sales and softer inflation data published last week.

With the British government having unveiled its proposals for ties with the European Union after the two divorce next year, all eyes are now on the response from Brussels.

Michel Barnier, the chief EU negotiator, said Britain’s proposals on its future relationship with the European Union contained constructive elements but that many questions remained.

“The pound continues to remain on the defensive, although there is at least some relief that an immediate leadership challenge to PM May appears unlikely before the parliamentary summer recess,” MUFJ analysts told clients.

“It leaves the upcoming BoE policy meeting on 2nd August as the main event for the pound over the holiday period.”

Against the euro sterling rose 0.1 percent to 89.12 pence per euro.

Reporting by Sujata Rao and Tommy Wilkes