Sterling recovers slightly but stays vulnerable

Sterling recovered slightly on Wednesday, though it remained vulnerable to falls as traders weighed the benefit of government support to shield the economy from COVID-19 pandemic over the high cost it will have to pay to do so.

Britain on Tuesday extended its job retention scheme, in which the government pays 80% of furloughed workers' wages, by another four months until the end of October. But analysts estimate it will cost the government billions to fund this scheme, which will then likely lead to higher debt and taxes.

Ministers will have to raise taxes sharply in the coming months to deal with an estimated £337bn deficit in the current financial year in the wake of the coronavirus pandemic, according to a leaked Treasury document, the Financial Times reported on Wednesday. "While the additional support for employment is welcome the cost could quickly start to weigh on investor sentiment especially if second COVID waves emerge going forward," said Derek Halpenny, head of research at MUFG.

The scheme is estimated to cost 49 billion pounds ($60 billion) through to June and Halpenny thinks it will cost an additional 30 billion pounds to run it through October, he said. Sterling was last trading up 0.2% at $1.2275 and 88.29 pence versus the euro.

However, the British currency has lost 2.5% of its value against the U.S. dollar so far this month, making it the biggest underperformed among the major currencies. Still, the pound was far off its March lows, when it sank to $1.14, its lowest in decades. ($1 = 0.8149 pounds)

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