Sterling strengthens on vaccine optimism, approaches 3-year high

LONDON (Reuters) – The British pound rose back towards its recent three-year high on Monday, boosted by a combination of heightened global risk appetite and optimism about the UK’s vaccine rollout.

Riskier currencies gained against the dollar, which edged lower as global market sentiment was lifted by an equity rally in the Asian session.

The pound strengthened even more than other “risk” currencies such as the Australian dollar and Norwegian crown.

After a row between Britain and the European Union over vaccine supplies, EU officials said on Saturday that it had been a mistake to invoke Northern Ireland Brexit emergency powers.

The UK said it expected its supply of COVID-19 shots would not be interrupted. Official data on Sunday showed that nearly 9 million people in the UK have been given their first dose of a vaccine.

In early London trading, the pound rose to $1.3758 – just shy of the three-year high of $1.3759 it reached on Wednesday last week. At 0902 GMT, it was at $1.3715, up 0.2% on the day.

Versus the euro it was up around 0.5% at 88.14 pence per euro, having hit its strongest since May 2020 earlier in the session.

Market participants are focusing on the Bank of England’s meeting on Thursday this week, at which the bank is set to publish the findings of a consultation on what negative rates would mean for banks’ operations.

Lee Hardman, currency analyst at MUFG, said in a note to clients that the argument in favour of another imminent easing of monetary policy has been dampened by the last-minute Brexit trade deal, the resilience of the UK economy at the end of last year, and the relatively fast rollout of vaccines in the UK.

“However, the tougher third lockdown is expected to deliver a larger negative hit to growth at the start of this year,” he added.

Most economists polled by Reuters think the BoE is unlikely to cut rates below zero this year.

“The most bullish potential outcome for the pound would be if the BoE leaves the key policy rate unchanged, and the consultation with lenders further dampens speculation over negative rates in the near term,” MUFG’s Hardman said.

“It could open the door to further GBP gains, lifting cable closer to 1.4000 and EUR/GBP towards the mid-0.8000’s.”

Weekly CFTC futures data showed that the net long position on the pound shrank in the week to Jan 26, although speculators were still overall bullish on the currency.

Graphic: CFTC, https://fingfx.thomsonreuters.com/gfx/mkt/qmypmyrjdpr/CFTC.png

(Reporting by Elizabeth Howcroft; Editing by Jan Harvey)