Sterling rises against dollar as stock market rallies

Sterling strengthened against the dollar on Monday as global risk sentiment improved, lifting European equities.

Risk-sensitive sterling has shown a strong correlation with the equity market, which rose on Monday as an easing of COVID-19 restrictions in China boosted commodity prices. The pan-European STOXX 600 index was up 1.3% at a two-week high at 0815 GMT.

The pound was up 0.3% versus the dollar at $1.2319, after briefly touching a 10-day high against the greenback. "The pound is being buoyed by the more supportive risk backdrop this morning, as evidenced by equities, but moves are very limited and the pound continues to trade in recent ranges," said Simon Harvey, head of FX analysis at Monex Europe.

"With limited economic events penciled in for today... equity performance is likely to continue driving broader FX price action," he added. Against the euro, sterling was steady at 85.95 pence.

Traders were also watching for further developments around post-Brexit arrangements, which could pose risks for the sterling. Prime Minister Boris Johnson said on Monday that Britain could implement unilateral changes to the post-Brexit trade rules governing Northern Ireland this year. That would set up further clashes with the European Union. The legislation, which would unilaterally replace parts of the post-Brexit deal that was agreed in 2020 by Britain and the EU, is due to be sent back to parliament's lower house for a so-called second reading.

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