LONDON (Reuters) - The pound rose to a four-week high against the dollar on Monday, comfortably above the $1.24 mark, as a risk-on mood in global markets prompted by hopes for an economic recovery caused the safe-haven dollar to weaken.
Global risk appetite took boost from signs that Europe’s economic downturn has reached its worst. This caused cable to strengthen as the dollar weakened.
The pound is still weighed down by many factors, including Brexit-related risks, speculation about negative rates and the fact that the United Kingdom has one of the highest COVID-19 death tolls in the world.
But the pound’s recent underperformance means it can rebound on a day-to-day basis.
“In a weak dollar environment, cable can actually slightly go higher – or at least be relatively range bound,” said Ebrahim Rahbari, Citi’s global head of FX analysts and content and chief G10 currency strategist.
Rahbari said that, out of all G10 currencies, he is most bearish on sterling. But, he added, the fact that it has been selling off sharply in the last few months makes it relatively cheap so it benefits from risk-on moves.
“When markets are risk-on these laggards tend to hold up fairly well,” he said.
Against a broadly weaker dollar, the pound hit a four-week high of $1.2488 around 1500 GMT. It was last at $1.2456, up 0.9% on the day. GBP=D3
Versus the euro, the pound strengthened around 0.8%, last at 89.22 pence, having gone as low as 89.17 earlier in the day. EURGBP=D3
The market’s net short position on the pound increased for the twelfth week running, according to weekly positioning data for the week ended May 26.
The last time investors were this bearish on the pound was in the run-up to the December 2019 election. 1096742NNET
New rules designed to ease the lockdown in England came into force on Monday.
A fourth round of trade talks on relations with the European Union following Britain’s departure from the bloc will start on Tuesday.
Britain has until July 1 to ask for an extension to the current transition period which is due to end in December.
“We expect the pound to continue to trade at weaker levels in the near-term unless there is a surprise breakthrough in Brexit talks and/or the BoE clearly rules out negative rates after completing their ongoing review of policy options,” Lee Hardman, currency analyst at MUFG, wrote in a note to clients.
For a graphic on Cable edges back above $1.24:
Reporting by Elizabeth Howcroft; Editing by Mark Potter and Lisa Shumaker