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Sterling edges up slightly, but struggles to regain momentum

Elizabeth Howcroft
·2-min read
FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

By Elizabeth Howcroft

LONDON (Reuters) -The pound was steady on Thursday, rising slightly against the euro but struggling to regain momentum as market participants weighed indications of how UK's lockdown-easing steps would affect the economic recovery.

Sterling had a strong first quarter, helped by relief that a no-deal Brexit was avoided at the end of 2020, by the pace of the UK's vaccine rollout and by a lessening of negative rates expectations.

But it has had a weaker start to April, hurt by profit-taking, and has traded in a close range this week.

England re-opened all retail stores, hairdressers, gyms and pub gardens on Monday. Scotland, Northern Ireland and Wales are due to re-open different sections of their societies in coming weeks.

English diners rushed back to restaurants this week and online job adverts have returned to pre-pandemic levels.

Simon Harvey, FX analyst at Monex Europe, said sterling was at an "impasse", where the lockdown easing measures had been priced in when they were announced and market participants are now waiting for data to show the impact.

"Gauging how the UK consumer reacts to less constraints over its consumption patterns is going to be a very, very key driver over the next quarter," he said.

"We're still quite bullish on sterling. We see it going up to the $1.40 level by the end of the month and we're looking for these alternative data points and potentially more timely traditional data points for cable taking the next leg higher," he said.

At 1529 GMT, the pound was at $1.3787, up 0.1% against the dollar.

Versus the euro, it was up 0.2% at 86.79 pence per euro. The pair broke the key 0.85 level for the first time in a year at the start of April, before weakening sharply.

Analysts also said that other countries would catch up on the UK's pace of vaccination, meaning that the so-called "vaccine trade" will not continue to support the pound.

"GBP has capitalised on expectations of a robust cyclical upswing, but we believe this looks increasingly priced-in," HSBC said in a note to clients.

"Likewise, the UK's early vaccine gap is set to narrow as other nations ramp up their vaccination campaigns. If the cyclical supports fade in allure, GBP bulls may be vulnerable to a renewed focus on the sizeable UK twin deficits," the note said.

But ING strategists were bullish, writing in a note to clients that the pound's bout of weakness versus the euro is fading, and they were looking at a "GBP recovery to EUR/GBP 0.85 this quarter."

(Reporting by Elizabeth Howcroft; editing by Simon Cameron-Moore, Larry King and Amy Caren Daniel)