Pound at five-month high as central bank strikes a less gloomy note

LONDON (Reuters) - Sterling rose to a five-month high against the dollar and headed for $1.32 after the Bank of England struck a less pessimistic tone on the coronavirus-battered British economy.

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble

Much of the gain in the pound came shortly after the BoE announcement. The currency rose as much as 0.5%, extending its run to a high of $1.3184, its highest since March 9, before easing to $1.3144, up 0.2% on the day.

Against the euro, it rose 0.5% at 90.01 pence, having earlier risen to a high of 89.85 pence.

The central bank said the British economy would not recover to its size at the end of 2019 until the end of next year, later than its earlier estimate of a recovery by the second half of 2021. But its projections for 2020 were less grim than in May.

“Overall, the BoE’s economic outlook is relatively less dovish than expected and the absence of a strong signal in favour of negative rates opens the door for further pound gains in the near-term,” MUFG analysts told clients.

Sterling has risen 8% against the U.S. dollar since July, with short positions in the Brexit-battered currency declining as traders shifted their negative outlook to the dollar.

The pound has reversed nearly all the losses sustained against the dollar following a selloff in March and April fuelled by the pandemic. Its gains have been more laboured against the euro and the yen.

“Today’s update from the BoE has no doubt triggered a little more short-covering,” said Chris Turner, ING’s global head of markets. “Cable may have some more upside on the back of a powerful dollar bear-trend – especially if the 1.3200 level breaks.”

Though the BoE said its policymakers unanimously voted to make no changes to its key interest rate, which stands at just 0.1%, strategists at Citibank noted that by dropping the reference to the lower bound for policy rates, the central bank is potentially opening the door to cutting rates below zero.

“We do not imminently expect negative rates due to the side effects on banks, but continue to forecast Bank Rate at -0.1% by mid-2021, once the COVID-19 and Brexit dust has settled,” they said in a note.

Reporting by Thyagaraju Adinarayan; editing by Larry King