Sterling drops versus euro and dollar, geopolitics in focus

By Stefano Rebaudo

Oct, 7 (Reuters) - Sterling dropped versus the euro and the dollar on Monday, with geopolitical risks and central banks' monetary policy path still in focus.

The pound recorded its biggest daily fall last week since April after Bank of England Governor Andrew Bailey was quoted as saying the central bank might move more aggressively to lower borrowing costs.

Analysts said Bailey's remarks triggered a substantial unwinding of stretched pound net longs, and that speculative positioning makes the British currency more vulnerable to shifts in sentiment.

The U.S. dollar edged down on Monday after a rally sparked by Friday's strong U.S. jobs data and an escalation in the Middle East conflict.

Sterling dropped 0.2% to $1.3090. It hit $1.3066 on Friday, its lowest level since September 12.

Britain's jobs market showed more signs of cooling in September, according to a survey likely to reassure the BoE as it considers whether to cut borrowing costs again.

The data calendar is not particularly busy in the UK this week, but market-moving releases, including jobs data and the consumer price index report, are due next week.

The euro has halved its post-Bailey gains on Friday and was last up 0.28% at 83.81 pence per euro.

"Sterling may experience volatility against the U.S. dollar given the uncertainty about the timing of rate cuts, but this is likely to be a short-term phenomenon," said Dean Turner, chief eurozone and UK Economist at UBS Global Wealth Management.

"Dollar weakness is likely to reassert itself in time as the U.S. currency loses its yield advantage amid falling U.S. interest rates," he added.

In the near term, sterling's outlook is still clouded, as geopolitical headwinds will likely affect price action, weighing on sterling, which is seen as a risky currency compared to the safe-haven dollar.

Investors expected the BoE to cut rates more slowly than the U.S. Federal Reserve and the European Central Bank, but that view was challenged late last week after Bailey's comments and strong U.S. jobs data.

While most economists think Bailey's view represents the majority on the BoE's nine-member Monetary Policy Committee, some flagged that he appeared to be sitting in the dovish contingent of the MPC after recent comments from Chief Economist Huw Pill, and rate setter Catherine Mann.

(Reporting by Stefano Rebaudo; editing by William Maclean)