Sterling reverses losses after falling to two-month low

"Sterling's slide at the beginning of the European session today underpinned the concerns that the investors have for the UK economy, which is right in the middle of this," said Gavin Friend, senior FX strategist at NAB Group. The pound recovered after Bank of England Governor Andrew Bailey warned escalating coronavirus cases reinforced the downside risks in his latest forecasts for the economy on Tuesday as he continues to consider whether negative rates would be effective in Britain.

The pound recouped losses after slipping to two-month lows against the dollar on Tuesday, as British Prime Minister Boris Johnson British Prime Minister Boris Johnson prepares to impose new restrictions to tackle a second wave of the coronavirus outbreak.

Sterling recovered as much as 0.08% to $1.2826 against the dollar at 0840 GMT, after sliding as low as 1.2714 earlier on Tuesday, its lowest since July 23. The pound was at 92 pence against the common European currency. "Sterling's slide at the beginning of the European session today underpinned the concerns that the investors have for the UK economy, which is right in the middle of this," said Gavin Friend, senior FX strategist at NAB Group.

The pound recovered after Bank of England Governor Andrew Bailey warned escalating coronavirus cases reinforced the downside risks in his latest forecasts for the economy on Tuesday as he continues to consider whether negative rates would be effective in Britain. Bailey said the Bank of England's latest policy statement did not imply it would necessarily use negative interest rates, and that observers should not read too much into it.

Johnson will tell people on Tuesday to work from home and announce new curbs on pubs, bars and restaurants, stopping some way short of a full national lockdown of the sort he imposed in March. "Assuming a full two-week lockdown ('circuit-breaker') is avoided, the markets may show signs of relief given there has for some time been a strong assumption that full lockdowns like in March-May would be avoided," MUFG Research said in a note.

Latest weekly positioning data shows a small long position in favour of the British pound, but the magnitude of the long bets is barely above zero and is far below the highs of nearly $2.8 billion in March. However, the positioning data is at odds with signals from the derivative markets which point to more weakness for the pound. Three-month risk reversals, a ratio of calls to puts for the currency, are approaching 2020 lows.

"The UK also has some pretty unique challenges with Brexit," Friend said. "If a deal is struck, sterling is going to rally hard, and if there isn't, sterling is going to be vulnerable. That's why markets are very flighty on sterling." The British government is attempting to pass a bill through Parliament that would allow it to break its Withdrawal Agreement with the European Union.

 

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