Sterling steadies after two-day decline, more losses seen

By Patrick Graham

LONDON (Reuters) - Sterling traded flat against the dollar and higher against the euro on Thursday as more signs of political and economic turbulence after Britain's vote to leave the European Union stopped short of providing a clear catalyst for more sales.

Analysts and traders are convinced further weakness is on the cards after sterling slipped below $1.30 for the first time in three decades on Wednesday.

A number of banks are now forecasting a fall to the low $1.20s and others expect eventual parity with the euro, compared with current levels of around 85 pence.

A generally brighter mood on financial markets globally in the European morning helped the British pound among other currencies regarded as higher risk. But that buoyancy faded as the day drew on and the NIESR think tank was the latest to warn of a "marked" slowdown after June.

There was no obvious reaction to news that the ruling Conservative Party is set to choose between interior minister Theresa May and eurosceptic rival Andrea Leadsom as its leader and nominee for prime minister when David Cameron steps down.

"Risk has been a little bit less well supported in the afternoon than it was this morning, but the moves in general have been quite small in comparison to what we have seen on sterling in the past week," said Sam Lynton Brown, a strategist with BNP Paribas in London.

"Our view is that sterling is likely to remain quite heavy."

The suspension of half a dozen open-ended property funds this week - taken as a sign of growing financial stress after the June 23 Brexit vote - has dominated trading, but some brighter U.S. economic data has helped lift the mood somewhat.

Sterling traded unchanged on the day at $1.2920 and 0.3 percent stronger at 85.592 pence per euro.

But dealers said bets on further weakness were the overwhelming majority in the market.

"This isn't any kind of turnaround really, it is just that the market is very short of sterling so any pause will see some retracement as people close out some of those open positions," said a trader with one large bank in London.

The prospect of a collapse in prices of UK property, a market that has attracted billions in foreign investment, has turned attention back to the inflows Britain needs to cover a current account deficit running at 7 percent of national output.

That hints at further big adjustments for sterling. The Bank of England (BoE) for now also appears set on cutting interest rates to help revive growth, rather than raising them to support the pound.

Manufacturing and industrial output data for the three months to May were slightly better than expected, but were largely discounted by markets as they cover a period before the shock of the Brexit referendum.

Markets now price in a full quarter-point cut at the bank's August policy meeting at the latest, and a substantial chance of the BoE doing more by September as the economy feels the full force of any Brexit-related slowdown in investment and trade.

"With May's manufacturing data yet to capture the new post-Brexit reality, many observers expect production to slump further in the coming months," UFX.com managing director Dennis de Jong said.

(Editing by Mark Heinrich)