LONDON (Reuters) - The pound surged on Thursday as investor risk appetite improved, though in the medium-term it is likely to remain governed by Britain’s apparent slower pace in easing coronavirus lockdown restrictions than its European counterparts.
Sterling rose more than 1% versus the dollar after the European Central Bank (ECB) said on Thursday it would pay even more for banks to borrow from it as it prepared for a long fight against the fallout from the coronavirus pandemic.
This has fuelled investors’ optimism that central banks will fill in the gaps left by governments to help seal the cracks in the global economy caused by the virus.
Sterling was last up 1.1% at $1.2605. It also rose 0.4% versus the euro to 86.90 pence.
“Sterling clearly is easily well risk-correlated and in an environment where there’s more optimism about a recovery then that provides a tailwind for sterling overall,” said Jeremy Stretch, CIBC’s head of G10 FX strategy.
“I think the issue of the timing of the ease of the lockdown can and will be a little bit of a headwind for sterling going forward. I would prefer to be selling rallies in sterling,” he said.
Britain now has Europe’s second-highest official COVID-19 death toll with more than 26,000, closely lagging Italy, according to figures published on Wednesday.
The government has said it is too early to talk of easing the lockdown and that it will not review social distancing guidelines until May 7.
One way to ease the lockdown measurements would be to introduce a contact-tracing app or have enough people tested to separate those who have the disease from those who are healthy.
This could be ready in two to three weeks, a senior official said on Tuesday. But Britain could miss its target of carrying out 100,000 coronavirus tests a day by the end of April, Justice Minister Robert Buckland said on Thursday.
The cost of sterling option contracts due in one month has fallen to 8.25 basis points, its weakest since March 10, suggesting investors were more relaxed about the possibility of potential headwinds for the pound.
Graphics: 1-month implied volatility in sterling falls to 7-week low - here
British businesses should not ignore the lockdown rules for pubs and restaurants to stay closed, Buckland said on Thursday, when asked about a plan by JD Wetherspoon to start reopening in or around June.
Reporting by Olga Cotaga; Editing by Larry King and Alex Richardson