May 5, 2020 / 8:27 AM / 19 days ago

Sterling rebounds as risk sentiment recovers

LONDON (Reuters) - Sterling rebounded against the dollar on Tuesday as demand eased for the U.S. currency on the back of improving risk sentiment in global markets, allowing the pound to recover some of its 1.5% loss this month.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Risk appetite improved in markets as governments eased lockdowns and U.S. officials said the United States was not looking to take punitive measures against China over the coronavirus outbreak, contradicting President Donald Trump’s threat to impose tariffs on China.

By 1550 GMT, sterling was up 0.1% against the dollar at $1.2449.

Against the euro, the pound gained as much as 0.7% at one point after the single currency weakened after a German court ruled that Germany’s Bundesbank must stop buying bonds under the European Central Bank’s stimulus scheme if the ECB cannot justify the purchases.

The pound last traded 0.6% higher against the euro at 87.13 pence.

Sterling is still down 1.2% against the dollar this month, after posting a 1.4% gain in April. April has historically tended to benefit the pound due to seasonal factors such as the start of a new UK tax year and corporate dividend repatriation flows. May, on the other hand, tends to be a month in which it has historically posted declines.

For an interactive version of the graphic below, click here tmsnrt.rs/2y8LyB7.

“Sterling has steadied after a sharp adjustment lower at the start of the month,” said Viraj Patel, FX and global macro strategist at Arkera. “The risks are still to the downside as global markets could find limited positive catalysts in May with much of the global monetary and lockdown easing sentiment priced in.”

Patel added that the risk of a second wave of coronavirus cases or a sharper UK economic slowdown in the coming months could keep sterling capped.

“Any further adjustment lower would be driven by U.S. dollar haven flows in a broader risk-off market.”

Incoming economic data in the UK continued to paint a dire picture. British new-car sales slumped by around 97% in April to their lowest since February 1946 with factories and dealerships, according to preliminary data from the Society of Motor Manufacturers and Traders.

A survey by the Confederation of British Industry showed small British manufacturers expect the biggest decline in output in more than 30 years over the next three months, echoing other gloomy forecasts for the sector.

There was a glimmer of positive news: the United States and Britain open will trade negotiations by videoconference on Tuesday.

Investors will be looking to the Bank of England meeting on Thursday, which could provide fresh catalysts for movement in the pound.

“We don’t expect the Bank of England to add fresh stimulus this week, although the pressure to beef up its QE programme will build over the next few months, not least because the economic recovery will be very gradual,” ING strategists said in a note.

“We think policymakers will push back on the idea of a ‘V-shaped’ recovery when it unveils new forecasts on Thursday.”

Reporting by Ritvik Carvalho, editing by Larry King and Mark Potter

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