Sterling breaks above $1.38 supported by vaccine push

Sterling edged up against the dollar on Wednesday, breaking above $1.38 and touching its highest level in almost three years as Britain's speedy coronavirus inoculation programme supported the currency. The pound has gained broadly in the past few weeks amid optimism over Britain’s rapid COVID-19 vaccination roll-out, while its Brexit deal with the European Union has also removed some pressure from the currency.

Sterling edged up against the dollar on Wednesday, breaking above $1.38 and touching its highest level in almost three years as Britain's speedy coronavirus inoculation programme supported the currency.

The pound has gained broadly in the past few weeks amid optimism over Britain's rapid COVID-19 vaccination roll-out, while its Brexit deal with the European Union has also removed some pressure from the currency. "GBP bulls have been flexing their muscles since the start of the year based on relief about the EU/UK trade deal and on hopes that the relatively rapid vaccine roll-out programme will lead to a fairly fast economic recovery this year," said Jane Foley, head of FX strategy at Rabobank.

Sterling was up 0.2% to $1.3846 against the dollar as of 1052 GMT, not far from its April 2018 high of $1.3855 hit in earlier London trade. Versus the euro, sterling traded 0.2% higher at 87.57 pence .

The pound is also finding support from the Bank of England's upbeat forecast that the British economy will regain its pre-pandemic size by the first quarter of 2022. "The UK's advanced vaccination rates may also start to show its impact in health outcomes and that certainly will strengthen the BOE's current relatively optimistic case," said Geoffrey Yu, senior EMEA market strategist at BNY Mellon.

BOE's decision to give lenders at least six months to prepare for the possible introduction of negative interest rates led money markets to push forward expectations of a rate cut to March 2022 from August 2021. Rabobank's Foley pointed out that this week, there was a lack of UK economic data to challenge the optimism, but she warned that GBP bulls were unlikely to face a smooth ride.

"The bumpy relationship between the UK and the EU, issues with the Northern Ireland protocol and border issues suggest that Brexit is still casting a shadow," Foley said. Britain has moved to tighten travel restrictions from next week and it will require passengers arriving from countries where worrying coronavirus variants are spreading to pay for 10 days of quarantine in hotels. Rule-breakers will face heavy fines or jail terms.