Sterling rises as dollar weakens, approaching pre-COVID levels

LONDON (Reuters) - Sterling benefited on Wednesday as the dollar weakened over concerns about the impact of the coronavirus pandemic, but was flat against the euro.

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

The pound rose to a five-month high of $1.2995, close to its pre-coronavirus levels, before settling at $1.2965, up 0.3% on the day. It was down 0.2% versus the euro at 90.80 pence. Graphic: Sterling -

Overnight implied volatility gauges in sterling/dollar rose to a month-and-a-half high of nearly 11, suggesting traders were prepared for some price turbulence.

Speculative funds were still short the British currency, the latest CFTC data showed, but the positions were not as strong as they were at the beginning of June.

One reason for the pound’s gains may have been that money managers were rebalancing their currency exposures after equities fell in Britain in July, said Marshall Gittler, head of investment research at BDSwiss Group. He noted that “hedge funds were particularly active buyers of sterling”.

Others said the moves were most likely caused by a broad weakening in the U.S. dollar.

“It’s all about growth, and growth expectations in Europe have started to outperform the U.S. I don’t see that really changing unless there’s a big second wave in Europe,” said Jordan Rochester, currency strategist at Nomura.

“You’ve got fiscal solidarity from the Europeans, you’ve got a fiscal stimulus from the Germans, you’ve got better mobility statistics in Europe. It’s all set up for a pretty good 2021 for Europe versus the U.S.,” he said. “I can see $1.30 being broken.”

In addition, Britain said on Wednesday that it had signed a supply deal for up to 60 million doses of a possible COVID-19 vaccine.

Some analysts, believe, however, that the surge in sterling may be just a blip, forecasting weakness by the year-end, when Brexit uncertainty may build up again as the transition period comes to an end.

“The fortunes of the pound will increasingly be driven by the monetary policy stance, the ability of the economy to rebound from the global pandemic, and Brexit negotiations, which are effectively stuck in the mud,” said Kamal Sharma, currency analyst at Bank of America, in a note to clients.

“These form the pillars of our structurally bearish view and we take this opportunity to flag GBP/CHF as the preferred expression of that view,” he wrote.

Sterling was last trading up 0.3% at 1.1907 Swiss francs.

Reporting by Olga Cotaga; Editing by Kevin Liffey and Alison Williams