Sterling touches US$1.42, hits highest vs euro in a year

[LONDON] Sterling hit US$1.42 on Wednesday, coming within touching distance of US$1.43, while also reaching a year's high against the euro as analysts retained their bullish views on the currency.

The pound is the best-performing G-10 currency this year, up nearly 4 per cent against the dollar and 3.2 per cent against the euro as investors bet Britain's rapid Covid-19 vaccine rollout will lead to a quicker economic rebound.

Analysts also point to relief over avoiding a "no-deal" Brexit with the European Union at the end of last year as benefiting the pound, with the market looking through short-term headwinds and disruption.

"Though we had anticipated a post-Brexit deal bounce in GBP (0.88 EUR/GBP; US$1.35 GBP/USD), our scepticism about the durability of the GBP recovery beyond the initial relief has been misplaced," said BoFA Global Research's FX strategists Kamal Sharma and Michalis Rousakis in a note to clients this week.

"Our default position for much of the past five years has been one of healthy scepticism towards Brexit and its implications and whilst the UK's handling of the pandemic in 2020 was lacking, it is in stark contrast to the highly effective vaccine roll-out in 2021."

This should position the UK economy for a stronger recovery in the coming quarters ... and enough to provide the pound with further support heading into a strong seasonal tailwinds in April, they said.

In Asian trading hours, sterling rose to US$1.4295 against the dollar, its highest since April 2020. It climbed to its highest against the euro in a year, touching 85.40 pence.

By 4pm GMT, sterling traded 0.1 per cent lower on the day at US$1.41 and 0.1 per cent higher to the euro at 85.96.

"Seemingly GBP is benefiting from a positive vaccine rollout and short-term Brexit adjustment problems disappearing, which also from a relative rates perspective is supporting GBP," said Lars Sparresø Merklin, senior analyst at Danske Bank.

"That said, momentum seems stretched and EUR/GBP seems oversold based on our short-term models, and hence we may see short EUR/GBP take a breather from here."

Also supporting sterling has been a pushing back of market expectations of negative rates by the Bank of England.

Money markets point to UK interest rates remaining above zero at least until August 2022, Refinitiv data shows. They were seen turning negative as early as June 2021 four weeks ago.

REUTERS