Sterling steadies after fall below $1.27

By Patrick Graham

LONDON (Reuters) - Britain's pound steadied on Wednesday after growing fears of a 'hard' Brexit from the European Union briefly drove it below $1.27 for the first time since 1985.

After hitting a 5-year trough against a broadly stronger euro in early trade in London, sterling recovered ground, helped by Prime Minister Theresa May's raising doubts over the side effects of ultra-low interest rates and money-printing.

The currency has been buffeted for a fortnight by worries that Britain will prioritise curbing immigration over promoting trade in its divorce from the bloc, perceived as posing further risks to growth and encouraging more stimulus from the Bank of England.

But May added to signs of a shift in thinking by policymakers globally away from monetary stimulus and in favour of governments doing more. That could instead push yields on sterling-denominated government bonds higher.

"We have seen some movements with the different comments today," said Craig Erlam, a market analyst with Oanda in London.

"May's comments had an effect but the pound is mainly just correcting a bit after the moves of the past few days."

Sterling hit a 31-year low of $1.2686 early on Wednesday before recovering to $1.2758, 0.2 percent higher on the day. It fell as much as 0.5 percent to 88.43 pence per euro before also clawing its way back into positive territory.

The broad takeaway for markets from this week's conference of May's ruling Conservative Party has been its intention of prioritising the question of immigration. The pound has fallen past long-term lows set in early July in response.

Investors worry a 'hard' Brexit will gum up labour markets, weaken foreign investment and encourage banks and other global companies to cut back on jobs and operations in Britain.

A report on Tuesday commissioned by consultancy firm Oliver Wyman said Britain's financial industry could lose up to 38 billion pounds ($48.3 billion) in revenue if the deal leaves it with restricted access to the EU single market.

"Sterling can fall further given the UK's balance of payments vulnerability and likely future constitutional uncertainty," said Roger Hallam, Currencies Chief Investment Officer with JP Morgan Asset Management in London.

"The pound is relatively cheap against most currencies when viewed from a historical standpoint. We believe this discount is well warranted and will likely extend further given the additional risk premium international investors will require to invest in the UK and sterling denominated assets."

Better-than-expected readings of sentiment among construction and manufacturing purchasing managers this week have done little to brighten the mood. Services numbers were also better than forecast but not initially enough to pull it higher on the day.

Before May's speech, Deputy Governor Ben Broadbent told a Wall Street Journal event that the Bank of England could raise interest rates if sterling fell sharply enough, but said that so far its moves have been orderly.

"Sterling has finally and belatedly responded to the heightened and prolonged Brexit uncertainty, notwithstanding a resilient UK economy and prospects of significant UK fiscal stimulus," said Greg Gibbs, director of independent research house Amplifying Global FX Capital.

"The outlook remains negative, but it is risky to jump on the selling bandwagon."

(Reporting by Patrick Graham; Editing by John Stonestreet and Richard Balmforth)