Sterling bounces back vs dollar as 'Trumpflation trade' fades

By Jemima Kelly LONDON (Reuters) - Sterling rose on Thursday from its lowest levels for almost 32 years -- excluding a "flash crash" in October -- with the dollar weakened by a lack of detail on President-elect Donald Trump's spending plans in his first news conference since his election. The greenback had rallied since Trump's victory in the Nov. 8 election, soaring to 14-year highs on the view that his fiscal stimulus programme would boost growth and inflation, leading to a faster pace of U.S. interest rate rises - the so-called "Trumpflation trade". But with Trump providing scant clarity on economic policy, the dollar fell to four-week lows, giving a lift to sterling, which was trading more than 2 cents higher than Wednesday's low . "The dollar is in pull-back – I would largely ascribe sterling's moves to that," said Societe Generale currency analyst Alvin Tan. Sterling had plunged to as low as $1.2038 on Wednesday on worries that Britain will face a "hard" exit from the European Union, with immigration controls given priority over single market access. That was its lowest level since May 1985, barring a brief crash to $1.1491 on Oct. 7 during a period of low liquidity. Though sterling was trading up half a percent on the day at $1.2270 on Thursday, analysts said Brexit worries would act as a persistent drag on the currency. The latest bout of nerves this week was driven by Prime Minister Theresa May, who sparked fears that Britain will lose single market access by saying over the weekend that Britain would not keep bits of EU membership. Traders are now focused on a decision - expected in the coming days - from Britain's Supreme Court on whether to approve a High Court ruling last year that said May's government needed parliamentary approval before triggering "Article 50", which will formally kick off Brexit negotiations. Investors reckon if lawmakers from across the political spectrum - a majority of whom supported staying in the EU in June's referendum - are involved in triggering Article 50, they will push for a "softer" Brexit, which would be sterling-positive. BREXIT DELAY A further boost to sterling could come if Britain is forced to delay its exit talks because of a potential suspension of Northern Ireland's regional assembly - which a lawyer said on Wednesday was a possibility. The resignation of Northern Ireland's Deputy First Minister Martin McGuinness on Monday effectively collapsed the devolved government. "If the Supreme Court were to both affirm the High Court decision and also ruled that the government had to obtain the approval of devolved legislatures, that’s even more positive for sterling. But the noise we’re hearing is that that’s probably not going to happen," said Tan. Bank of England Governor Mark Carney said on Wednesday that the immediate risks from Brexit had fallen, and that the central bank may now raise its forecasts for the UK economy. [ "While we tend to agree, we do believe the second-rounds effects of higher inflation, squeeze in real disposable incomes and slowdown in consumer spending will force the BoE into action again later this year," said ING currency strategist Viraj Patel. "The general market perception...is underestimating the risks of a lower Bank rate and this makes sterling vulnerable to a dovish BoE re-pricing in the near-term." Against the euro, sterling was flat at 86.69 pence . (Reporting by Jemima Kelly)