The downward trend in COVID-19 cases, although they are still high, coupled with the reopening of the British economy has fuelled a rebound in the pound, which has appreciated in value by roughly three percent in less than a fortnight to hit close to $1.40. Broad dollar weakness, exacerbated by a dovish Federal Reserve meeting this week, is also helping sterling.
By 7.45am on Friday, the pound was marginally higher at $1.3965, slightly below the one-month high of $1.3982 reached on Thursday, and by noon had pushed up to $ 1.3971.
The pound has gained 1.6 percent against the dollar this week alone – making it one of the top-performing major currencies.
Against the euro, sterling was a little weaker at 85.18 pence.
However, it still remains close to its strongest level versus the single European currency since early April.
The BoE, which meets on Thursday, is expected to keep its foot firmly pressed on the stimulus pedal.
However, there is growing discussion about the need to begin tapering its bond-buying programme as the economy recovers.
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“While most of this will be down to the belief that COVID-19 case numbers and hospitalisations are heading in the right direction, we also have a Bank of England meeting next week to contend with.”
He added: “Rate expectations are starting to increase once again, but we also have to remember that a lot of the GBP move in the past week has been as a result of the USD depreciation and not GBP strength.
“If we want to see prices above the 1.40 level then we’ll need a hawkish Bank of England meeting next week.”
George Vessey, UK Currency Strategist, Western Union Business Solutions, said: “Pressured below the key psychological barrier of $1.40, the pound’s gains have been driven by a fall in coronavirus cases in Britain, the dovish US Federal Reserve (Fed) weighing on the dollar and a disappointing US GDP data release.
“That said, escalating coronavirus concerns have revived the global growth concerns, weighing heavily on the market mood.”
Sterling’s performance has tracked global risk sentiment in recent weeks, with the currency’s performance in line with the direction of global stock markets, Mr Vessey said.
He added: “With that in mind, the market is highly sensitive to the UK COVID situation given the degree of bad news priced in from elsewhere around the world.
“Falling cases, and small rises in hospitalisations, would be a sign of confidence in the UK’s reopening experiment and could keep the sterling strong despite global concerns.”
A “hawkish tone” at next week’s meeting could see the $1.40 barrier broken with traders eyeing $1.4250, Mr Vessey predicted.
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