The pound rallied above $1.27 for the first time in six weeks on Tuesday as optimism over a coronavirus vaccine and an EU agreement on a recovery fund enabled it to extend the previous day’s rally.
The currency had enjoyed its best day in three-weeks on Monday, lifted by the generally buoyant market mood which allowed investors to overlook poor British economic data and lack of concrete progress on Brexit trade talks.
Aside from the EU recovery fund agreement, early data from trials of three potential COVID-19 vaccines, has been promising.
“Generally, it’s more about improvement in general risk sentiment. When you have risk-on in equities, the pound generally benefits,” MUFG strategist Lee Hardman said.
A relatively bullish assessment of the British economy by Bank of England chief economist Andy Haldane could also be supporting the pound, Hardman added.
The currency rose as high as $1.2716, the highest since June 11, and by 1130 GMT it was at $1.2703, up 0.34% on the day. Versus the euro, sterling firmed 0.4% at 90.12 pence, around a one-week high.
Meanwhile, data showed British government borrowing at a record 127.9 billion pounds ($162 billion) in the first three months of the 2020/21 financial year – more than double the total for the whole year before.
June borrowing alone, excluding state-owned banks, was 35.5 billion pounds, five times higher than a year earlier.
Britain’s debt to GDP ratio is likely to exceed 100% soon, the UK Office for Budget Responsibility on Tuesday afternoon.
Graphic: Pandemic prompts unprecedented surge in UK borrowing – here
Meanwhile a sale of 30-year government bonds drew the lowest demand since March, continuing a recent pattern whereby investors accept record low yields for short-dated UK debt but are less keen on longer maturities
Commerzbank analysts said the state of the economy and Brexit risks meant the pound would “have to fight against strong headwinds”, especially if the state of the economy forces the Bank of England to consider negative interest rates at its August meeting.
The pessimism is reflected in speculative positioning on sterling; short positions are around the levels of Dec. 2019, when investors were hedging against the prospect of a hung parliament in a general election.