Pound hits two-month highs versus euro as vaccine seen as UK lifeline

[LONDON] Sterling hit its highest level in more than two months versus the euro on Wednesday as investors were optimistic that a vaccine against Covid-19 would provide a lifeline to the UK economy and more hopeful about the chances of a Brexit deal.

Global markets have surged this week in response to an announcement on Monday by Pfizer that its experimental Covid-19 vaccine is more than 90 per cent effective.

The pound benefitted as investors judged that a possible vaccine would be a particular boon to the UK, which has seen its economy ravaged by the coronavirus.

"Since Britain has been disproportionately hit by the virus, it will be disproportionately helped by a vaccine," wrote Marshall Gittler, head of investment research at BDSwiss Group.

Pound-traders had feared that the economic fallout from a second nationwide lockdown, combined with the possibility of Britain and the European Union (EU) failing to agree on a post-Brexit trade deal, could push the Bank of England (BOE) to introduce negative rates in January.

"A Covid-19 vaccine hope would lift the very heavy clouds that have hung over the UK economy since this spring, also likely banishing any thoughts of a negative rate policy from the BOE," John Hardy, head of FX strategy at Saxo Bank said in a note to clients.

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The pound was up 0.1 per cent on the day at US$1.3291 at 8.50am GMT, up more than 1 per cent since Monday and at its highest since September.

Versus the euro, it was up around 0.2 per cent at 88.785 pence per euro, having also touched its highest since early September .

Mr Hardy said that if there is a Brexit breakthrough and Covid-19 vaccine hopes are sustained, then euro-sterling could head towards 0.86.

Britain left the EU in January and both sides are negotiating to agree a trade deal for when the status-quo transition period ends on Dec 31.

Some analysts said that Democrat Joe Biden's victory in the US presidential elections is supportive of a deal being reached. Mr Biden stressed the importance of protecting Northern Ireland's peace deal in the Brexit process when he called UK Prime Minister Boris Johnson on Tuesday.

"I nonetheless remain sceptical: in the brief period of time until year-end it will be difficult to reach an agreement with the EU that would resemble even remotely to what full access to the internal market offers," wrote Commerzbank analyst Antje Praefcke.

"In that case the British economy would not only have to deal with the effects of the corona crisis, vaccine or no vaccine, but would also face the obstacles of trade being less free than during the transition period. That does not make me feel particularly positive for Sterling," she added.

REUTERS