Sterling rises due to cautiousness over Fed meeting, Brexit in focus

The pound edged higher on Tuesday thanks to broad dollar weakness against its rivals as investors waited cautiously for developments on Brexit negotiations with less than two weeks before the United Kingdom is due to leave the European Union. The British currency got off to a volatile start to the week, shedding half a per cent in late London trading on Monday, after John Bercow, the speaker of Britain's parliament, said Prime Minister Theresa May's Brexit deal could not be voted on again unless a different proposal was submitted.

While traders have steadily reduced their fears that Britain will crash out of the EU without a deal in recent weeks, Bercow's move means more uncertainty in the short term as the government races to convince opposing lawmakers to back May's deal or request for an extension. "The predominant notion adopted by the market is that as long as the worst case scenario of hard Brexit is avoided by delaying Brexit, the pound is a buy on dips," Rabobank strategists said in a note.

That view was shared by Morgan Stanley strategists who said the pound remained a buy on dips. The U.S. bank's positioning tracker showed broader market positions on the pound was broadly neutral. Against the dollar, the pound firmed 0.1 per cent higher at $1.3267. It rallied to a 9-month high against the greenback to nearly $1.34 last week and is down less than a per cent from those highs.

Against the euro, the pound was broadly steady at 85.55 pence. Despite the latest political developments, various gauges of volatility indicators for the pound ticked lower on Tuesday, reflecting a broader drop in currency market volatility.