Sterling rises as dollar weakens, approaching $1.30

Sterling benefited as the dollar weakened on Wednesday, rising 0.3%, but was flat against the euro, as the impression grew that the rest of the world was handling the coronavirus pandemic better than the United States. The pound rose to a five-month high of $1.2977, close to its pre-coronavirus levels, before settling at $1.2965, up 0.3% on the day.

Sterling benefited as the dollar weakened on Wednesday, rising 0.3%, but was flat against the euro, as the impression grew that the rest of the world was handling the coronavirus pandemic better than the United States.

The pound rose to a five-month high of $1.2977, close to its pre-coronavirus levels, before settling at $1.2965, up 0.3% on the day. It was up 0.1% versus the euro at 90.58 pence. Overnight implied volatility gauges in sterling/dollar rose to a month-and-a-half high of nearly 11, suggesting traders were prepared for some price turbulence on.

Speculative funds were still short the British currency, latest CFTC data showed, but the positions were not as strong as they were at the beginning of June. One reason for the pound's gains may have been that money managers were rebalancing their currency exposures after equities fell in the UK in July, said Marshall Gittler, head of investment research at BDSwiss Group. He noted that "hedge funds were particularly active buyers of sterling."

Others said the moves were most likely caused by a broad weakening in the U.S. dollar. "It's all about growth, and growth expectations in Europe have started to outperform the U.S. I don't see that really changing unless there's a big second wave in Europe," said Jordan Rochester, currency strategist at Nomura.

"You've got fiscal solidarity from the Europeans, you've got a fiscal stimulus from the Germans, you've got better mobility statistics in Europe. It's all set up for a pretty good 2021 for Europe versus the U.S.," he said. "I can see $1.30 being broken." In addition, Britain said on Wednesday that it had signed a supply deal for up to 60 million doses of a possible COVID-19 vaccine.

Some analysts, believe, however, that the surge in sterling may be just a blip, forecasting weakness by the year-end, when Brexit uncertainty may build up again as the transition period comes to an end. "The fortunes of the pound will increasingly be driven by the monetary policy stance, the ability of the economy to rebound from the global pandemic, and Brexit negotiations, which are effectively stuck in the mud," said Kamal Sharma, currency analyst at Bank of America, in a note to clients.

"These form the pillars of our structurally bearish view and we take this opportunity to flag GBP/CHF as the preferred expression of that view," he wrote. Sterling was last trading up 0.3% at 1.1907 Swiss francs .

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