Sterling edged up 0.4% on Thursday against the dollar as investors delayed responding to finance minister Rishi Sunak's announcement of plans to revive the economy, while Brexit risks continued to weigh on the British currency.
Sunak promised an additional 30 billion pounds ($38 billion) on Wednesday to help the coronavirus-hit economy. He announced bonuses to get furloughed staff back to work, cut value-added tax for the hospitality sector and temporarily scrapped a property tax on purchases of homes costing up to 500,000 pounds.
Investors barely reacted to the news immediately after the announcement, and sterling was steady on Wednesday a day after hitting three-week highs against both the dollar and euro.
But the pound was up on Thursday to $1.2655 at 1005 GMT against a broadly weaker dollar, which fell against most currencies as a rally in riskier assets dented demand for the safe-heaven currency. Versus the euro, sterling rose 0.3% to 89.55 pence.
"There has been a little bit of a delayed response, I think, to the fiscal story here in the UK," said Stephen Gallo, European head of the FX strategy at BMO Financial Group.
Gallo said Sunak's fiscal plan is no game changer and that he expects sterling to remain under pressure over the summer if Britain and the European Union fail to make progress in agreeing their future trading relationship.
"If it weren't for the Brexit factor, which is holding down the pound, I think the pound would be significantly higher now because the UK has a much more dynamic fiscal story than the euro zone as a whole," Gallo said.
British and EU negotiators on Tuesday kicked off a new round of talks. German Chancellor Angela Merkel said she will continue to push to seal a deal by the end of the year, but the EU should prepare for the possibility of a no-deal scenario.
Britain, which left the EU on Jan. 31, wants the same terms as Australia has if it cannot agree on a trade, Prime Minister Boris Johnson told Germany's Angela Merkel in a telephone call on Tuesday.
Australia has no comprehensive trade agreement with the EU. Much of EU-Australia trade follows default World Trade Organisation rules, though specific agreements are in place for certain goods. (Editing by Mark Heinrich)