Sterling adds to recent gains after May says to lead Brexit talks

LONDON (Reuters) - The pound rose on Wednesday to its highest in a week as traders bet that Prime Minister Theresa May’s decision to take control of Brexit negotiations would make it easier to agree a divorce deal with Brussels.

With less than nine months before Britain is due to leave the European Union and May’s own political party still divided about what sort of trading relationship with Brussels they want, Brexit talks remain a headwind for the pound.

May said on Tuesday that her office would now lead Brexit negotiations rather than the dedicated Brexit ministry, giving the currency a boost.

Rising expectations of a Bank of England interest rate rise - the market is currently pricing in an 86 percent chance of a 25 basis point hike at next week’s monetary policy meeting - have also helped the currency off 10-month lows hit last week.

“May’s decision to become more directly involved in Brexit negotiations as they enter a more crucial phase has been welcomed by financial market participants,” MUFG analysts said.

The pound rose to as high as $1.3173 against the dollar, its highest level since July 17, before giving up some gains as the greenback recovered.

Sterling, which has been much less volatile against the euro, was unchanged versus the single currency at 88.885 pence per euro.

“Our central expectation is still for the UK and EU to coalesce around a cooperative outcome, which sees the UK transition out of the EU over the secular horizon,” Mike Amey, head of sterling portfolios at PIMCO, wrote this week.

“In that event we see some scope for a recovery in business investment, although clearly there are material risks around this expectation,” he said, predicting a slow pace of monetary tightening.

Reporting by Tommy Wilkes; Editing by Jon Boyle