By Elizabeth Howcroft

LONDON (Reuters) – The British pound rose on Monday to its highest against the euro since May 2020 and came close to recent three-year highs against the dollar, boosted by a combination of heightened global risk appetite and optimism over the UK’s COVID-19 vaccine rollout.

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

After a row between Britain and the European Union over vaccine supplies, EU officials on Saturday said 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.

Michael Hewson, chief market analyst at CMC Markets UK, said the pound was benefiting from vaccine progress.

“The economy that does the best will be the one that’s able to get its population vaccinated earliest, and at the moment that looks like the UK,” he said.

With the impact of Brexit is already priced in, Hewson thinks the pound, if it goes through $1.3760, is likely to reach $1.40 in the first half of this year, maybe by the end of March.

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. By 1215 GMT it was at $1.3721, up 0.2% on the day.

Versus the euro the pound was up about 0.6% at 88.09 pence after touching its strongest since May 2020.

Market participants are focusing on the Bank of England’s meeting on Thursday, at which the bank is set to publish 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 Bank of England is unlikely to cut rates below zero this year.

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

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

(Reporting by Elizabeth Howcroft; Editing by Jan Harvey and David Goodman)