Pound holds most gains as PM May survives vote but Brexit in peril

© Reuters. FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester

By Daniel Leussink

TOKYO (Reuters) - The pound held onto most of the previous session's gains on Thursday after British Prime Minister Theresa May survived a no-confidence vote, buying time to try to steer her unpopular Brexit deal through a deeply divided parliament.

The euro trod water ahead of a closely-watched policy meeting by the European Central Bank later in the day, after edging higher on news that Italy lowered its deficit target for next year and expected the European Commission to accept its new 2019 budget proposal.

The dollar index (DXY), which measures the greenback against six key rivals, was up a tad at 97.097. It had fallen from a near one-month high overnight, losing 0.4 percent, its steepest drop in two weeks.

In Britain, lawmakers from the ruling Conservatives held a secret ballot on whether they had confidence in May's leadership of the party. Going into the vote and needing backing for her efforts to deliver Brexit, May had assured them that she would not lead the party into the next election due in 2022.

She won support from 200 of 317 Conservative lawmakers, and the mutiny by more than a third signaled that she was no closer to getting parliament's approval for her plan to leave the European Union, making it likely that sterling's respite would prove temporary.

"Just after the actual result was announced, profit-taking dominated, (but) sterling stopped appreciating," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

"That shows it's not bad news, but it doesn't fix the Brexit issue. In that sense, uncertainty continues."

Sterling lost 0.1 percent on the day to $1.2614. It had bounced off a 20-month low of $1.2477 during the previous session, ending 1.1 percent higher on the day in the aftermath of the vote.

With Britain due to leave the EU on March 29, parliament's opposition has suddenly opened up possibilities including a potentially disorderly exit with no deal or even another referendum on membership.

The euro (EUR=) held steady at $1.1367 after tacking on nearly half a percent during the previous session.

The ECB is all but certain to formally end its lavish bond purchase scheme on Thursday but will take an increasingly dim view on growth, raising the likelihood that its next step in trimming stimulus will be delayed.

"Everybody wants to have a hint regarding whether the ECB will raise interest rates next year but that will probably not happen," said Yukio Ishizuki, senior currency analyst at Daiwa Securities.

Investors are hoping to find out whether the ECB will start raising interest rates before ECB President Mario Draghi's term ends in October next year, he added.

Against the Japanese yen, the dollar rose nearly 0.2 percent to 113.45 yen as demand for riskier assets increased on growing signs of a thaw in Sino-U.S. trade relations, and on expectations that Beijing will implement more support measures for the economy.

Traders said China on Wednesday made its first major purchases of soybeans since U.S. President Donald Trump and his Chinese counterpart Xi Jinping hammered out a temporary trade war truce earlier this month.

The offshore yuan traded at 6.8717 per dollar, after strengthening almost half a percent from 6.8980 per dollar during the previous session.

Mizuho's Yamamoto said he expected the yuan to remain "sandwiched" between strong and weak factors as the currency's moves are not just driven by developments in the Sino-U.S. trade war but also by fears of a cyclical and structural slowdown in China's economy.

"To cope with the slowdown, the Chinese authorities need a not-strong renminbi, but it can't weaken too much -- above seven renminbi per dollar," Yamamoto said.

He added while China's authorities don't want a very strong renminbi, he did not expect Chinese interest rates to rise anytime soon.

"The interest rate differential between the United States and China will weigh on the renminbi," he said.

China's central bank faces a test next week if the U.S. Federal Reserve raises interest rates as widely expected.