Sterling nears 200-day moving average at $1.27, risk appetite grows

Sterling was close to its 200-day moving average of $1.27 against the dollar on Monday, last trading flat at $1.2616.

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Against the euro, which rallied on Monday, the pound fell 0.7% to 90.14 pence, within sight of its 55-day moving average at 89.30.

Boosted by increased risk appetite and hefty fiscal stimulus announced last week by finance minister Rishi Sunak, the British pound is attracting investor attention, rising nearly 2% so far this month.

Second only to the Norwegian crown, sterling has been the best-performing currency in July as traders moved into riskier assets, such as equities, buoyed by hopes of an economic recovery post-COVID-19.

On Monday, European shares were in positive territory as markets looked to the earnings season, expecting most U.S. companies to beat forecasts as the bar has been set low.

“The pound remains strongly positively correlated with the performance of global equities,” said Lee Hardman, currency analyst at MUFG.

“According to our calculation, the 30-day rolling correlation between daily percentage changes in GBP/USD and MSCI ACWI index remains elevated at +0.56,” Hardman said.

Britain’s exit from the European Union, however, weighs on investors’ minds.

Britain is urging businesses and individuals to prepare for the Dec. 31 end of the Brexit transition period with an information campaign entitled: “The UK’s new start: let’s get going.”

But a survey from lobby group the Institute of Directors said only a quarter of companies were fully ready for the end of the transition.

Britain left the EU on Jan. 31, three and a half years after a referendum, but a transition period has delayed any major change in the relationship.

Jane Foley, senior currency analyst at Rabobank, said: “Sterling’s good run may have run out of steam.”

She recommended “buying EUR/GBP on dips,” citing reasons such as Brexit uncertainty, the shock of the COVID-19 lockdowns, and the lingering talk of interest rates going into negative territory.

Rabobank sees euro/sterling rising to 92 pence in three months, Foley said.

Reporting by Olga Cotaga; editing by Larry King and Barbara Lewis