The pound retreated after hitting its strongest level in three years as concern over a new coronavirus strain outweighed bets on the U.K. economic recovery.
Sterling fell as much as 0.2% as the dollar erased losses. While Britain has seen relative success in containing the pandemic, Prime Minister Boris Johnson’s plan to fully reopen the economy on June 21 hangs in the balance as the new strain looks to be more transmissible than the one that took hold late last year and led to another lockdown.
Analysts at Commerzbank AG and Toronto-Dominion Bank are instead pinning the pound’s earlier gains on a retreat in the greenback. The Bloomberg Dollar Spot Index traded little changed after declining toward the lowest in three years.
“The whole ‘U.K. vaccine’ story is a little tired,” said Ned Rumpeltin, European head of foreign-exchange strategy at Toronto-Dominion Bank. “It’s probably less about the U.K. and more about the USD, which has been drifting lower overall.”
Sterling’s advance came as leveraged names add longs above $1.4220, according to a Europe-based trader, who asked not to be identified as they’re not authorized to speak publicly.
Yet the options market suggests reason for caution as wagers on pound declines against the dollar trade at a premium across tenors. One-week risk reversals, a gauge of sentiment, signal bearishness on sterling has grown since last week.
Beyond reopening prospects, the pound had been buoyed by speculation that the Bank of England will join its peers in Canada and New Zealand by signaling it may start to raise interest rates next year.
BOE Deputy Governor Dave Ramsden told the Guardian newspaper that there’s a possibility the economic recovery from the pandemic will lead to sustained inflation, and that the bank is monitoring the country’s booming housing market. Traders will be on alert for any signals from BOE Governor Andrew Bailey, who’s set to speak today at a conference.
Overnight-indexed swaps signal a 46% probability the central bank will raise its benchmark rate by August 2022, according to data compiled by Bloomberg.
“The U.K.’s economic recovery and associated growing expectations about the Bank of England ending asset purchases and hiking eventually are driving bullish pound bets,” said Alvin T. Tan, a strategist at RBC Capital Markets in Hong Kong.