Pound hits six-month highs versus euro; vaccine progress outweighs Brexit deadlock

Sterling rose to a six-month high versus the euro on Wednesday amid optimism that a vaccine against COVID-19 would bolster the UK economy and shifting expectations for Brexit and negative interest rates. Global markets surged this week after Pfizer Inc announced on Monday that its experimental COVID-19 vaccine was more than 90% effective.

Sterling rose to a six-month high versus the euro on Wednesday amid optimism that a vaccine against COVID-19 would bolster the UK economy and shifting expectations for Brexit and negative interest rates.

Global markets surged this week after Pfizer Inc announced on Monday that its experimental COVID-19 vaccine was more than 90% effective. The pound benefited as investors judged that a 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. The pound hit 88.61 pence per euro at 1153 GMT. The euro was down around 0.4% on the day versus the dollar .

Cable was down 0.1% on the day, at $1.3262 at 1203 GMT , still up around 0.8% since Monday. Pound traders had feared that the economic fallout from a second nationwide lockdown, combined with the threat of Britain and the European Union failing to agree on a post-Brexit trade deal, could push the Bank of England to introduce negative rates in January.

But a possible vaccine could go some way to mitigate the risk of negative rates, said Kit Juckes, head of FX strategy at Societe Generale, who noted that the G10 currencies which are down on the week versus the dollar are those with negative rates. "It is a shift and the UK-negative was doubling up on pandemic and no-deal Brexit. If you reduce either side of that, it's not as exceptionally dreadful as it was before," he said. "If we don't get a deal, the chances of negative rates are maybe smaller now."

Money markets are now pricing in negative interest rates in Britain by August 2021 compared with May last week. The vaccine optimism appeared to outweigh lack of progress in Brexit negotiations.

Britain left the EU in January and both sides are negotiating to agree a trade deal for the end of the transition period on Dec. 31. Some analysts said that Democrat Joe Biden's victory in the U.S. presidential elections supports a deal. 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 what full access to the internal market offers," wrote Commerzbank analyst Antje Praefcke. The EU-UK trade talks are set to continue past a mid-November deadline, according to sources on both sides.

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