April 6, 2020 / 7:56 AM / in 2 months

Sterling steadies as PM Johnson expected back at his office "shortly"

LONDON (Reuters) - Sterling steadied against the dollar on Monday, recovering from a slight dip overnight on expectations that British Prime Minister Boris Johnson will “shortly” be back at work after being taken to hospital with persistent coronavirus symptoms.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

The bounce back came after housing minister Robert Jenrick said Johnson was “doing well” and was expected to be back at 10 Downing Street, his official residence, shortly.

The British currency had hovered near one-week lows overnight after the British leader was taken to hospital for tests on Sunday evening.

“Markets were initially quick to jump to the worst possible conclusion and assume that the PM’s illness would create a degree of dysfunctioning within the UK government, which was not the case given that there were measures in place to deal with such a scenario,” said Viraj Patel, global FX and macro strategist at Arkera.

Foreign minister Dominic Raab would take from Johnson if the prime minister was no longer able to continue his duties, he noted.

“What we’re seeing now is the pound retracing this unusual move lower as details emerge that we’re far from the worst-case scenario of the UK government being plunged into disarray,” Patel said.

By 1525 GMT sterling was trading 0.2% higher at $1.2286. Against the euro, it also gained 0.2% to trade at 88.02 pence.

The pound remains down against both the euro and the dollar since the start of the year, by around 4% and 7% respectively.

OUTLOOK BLEAK

Sterling has recovered some ground against the dollar in the past three weeks as demand for the U.S. currency has eased globally after central banks adopted massive stimulus measures to combat the economic impact of the coronavirus pandemic.

However, analysts have said the fundamental outlook for the currency remains weak as a ramp-up in government spending threatens to worsen the UK’s current account deficit.

That, along with weak economic data due to the pandemic and the backdrop of ongoing Brexit trade talks, are among reasons analysts say the currency appears vulnerable.

Britain’s construction sector last month saw its sharpest fall in activity since the financial crisis more than a decade ago, despite facing much less pressure than other industries to shut down operations due to the coronavirus pandemic.

British consumer confidence recorded its biggest fall in more than 45 years, another survey showed on Monday.

A group representing Britain’s car industry cut its sales forecast for this year by 23% to 1.73 million vehicles because of the impact of the coronavirus crisis.

“Economic data are beginning to show the scale of the impact of the pandemic on the UK and this comes on top of existing concerns about how the UK will cope with a new set of post-Brexit trade rules, assuming that the (Brexit) transition period ends at the back end of this year,” Jane Foley, FX strategist at Rabobank, said in a research note titled ‘GBP - Grim and Grimmer?’

“Generally speaking, any perceived weakening of domestic fundamentals is likely to be more reflected in a currency where there is a current account deficit than otherwise.”

Speculators trimmed their net long positions on the pound in the week to Tuesday, March 31, CFTC data showed on Friday. [IMM/FX]

Reporting by Ritvik Carvalho and Thyagaraju Adinarayan; additional reporting by Saikat Chatterjee; Editing by Gareth Jones and Susan Fenton

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