Sterling Steadies Around $1.40, Long Positions at One-Year High

LONDON (Reuters) – The pound hit a new three-year high of $1.4050 in early London trading on Monday, before stabilising around the $1.40 level, as bullish investors bet on the UK’s vaccination rollout bringing about an economic recovery.

Sterling rose to its highest levels since April 2018 when it crossed $1.40 on Friday, having risen 2.4% so far in 2021.

Analysts attributed the recent strengthening to the UK’s relative success in providing COVID-19 vaccinations, which is expected to help Britain’s economy rebound from its biggest contraction in 300 years.

Relief that a no-deal Brexit was avoided at the end of 2020 is also supporting the pound, as is a lessening of fears that the Bank of England could introduce negative interest rates.

Speculators added to their net long position for the third week running in the week to Feb. 16, CFTC positioning data showed. The market is at its most bullish in one year.

At 0839 GMT, the pound was at $1.3992, down 0.1% on the day. Versus the euro, it was up around 0.2% at 86.42 pence per euro, having touched a one-year high earlier in the session EURGBP=D3>.

“The move higher in cable this year has been primarily driven by pound strength rather than US dollar weakness,” wrote MUFG currency analyst Lee Hardman in a note to clients.

“If the highs from April 2018 are taken out it will encourage expectations that the pound is adjusting to a new higher equilibrium now that Brexit risks have diminished,” he said. “Whereas if those highs remain in place, market participants may then start to question whether recent pound strength is overshooting and thereby increasing the risk of a correction lower.”

British Prime Minister Boris Johnson will set out a plan on Monday to release the UK from its third national lockdown.

Some 17.6 million people, over a quarter of the 67 million population, have now received a first dose of a COVID-19 vaccine. The UK is behind only Israel and the United Arab Emirates in vaccines per head of population.

The yield on British government bonds jumped on Monday, boosted by the prospect of heavy U.S. fiscal stimulus and the UK economy reopening.

“Markets are still adjusting to the fact that the Bank of England is unlikely to implement negative rates for now, leading to a narrowing of the US-UK 10-year yield differential,” UBS strategists wrote in a note to clients.

(Reporting by Elizabeth Howcroft; Editing by Bernadette Baum)