LONDON - Sterling steadied against the dollar and euro on Thursday, stanching its losses after a bruising bout of profit-taking, with traders optimistic for its near-term prospects after a strong start to the year.
The pound racked up losses of 1.2% against the dollar and 1.7% against the euro between Tuesday and Wednesday as investors took cash off the table after a strong first quarter for the British currency.
But by 1100 GMT on Thursday, sterling was flat against the dollar at $1.3741, away from its lowest this month, with the greenback on the back foot against major peers.
Against the euro, the pound traded up 0.1% at 86.30 pence per euro, after its worst day against the single currency in five weeks - a move traders said was amplified by a squeeze of euro-pound short positions.
ING analysts wrote that sterling's pullback was "exaggerated," adding that they "remain constructive on the currency," citing Britain's relatively fast COVID-19 vaccine programme.
Britain has surged ahead of the rest of Europe in the race to inoculate its population, with almost half of its citizens receiving a first dose. But supply issues from its main Oxford-AstraZeneca vaccine have slowed progress in recent days.
Expectations of an economic rebound in Britain, spurred by rapid vaccinations, helped sterling to record its best quarter since 2015 versus the euro. Falling expectations of negative interest rates also helped.
Still, some market players said sterling may struggle to maintain its strength.
"We are starting what's likely to be much more challenging quarter for sterling," said Adam Cole, chief currency strategist at RBC Capital Markets, with positive news on vaccines and the lower risk of negative rates already priced in.
Others said Britain's economic performace in the next quarter would be a key factor. With infection numbers falling, a planned partial re-opening of the economy is due next week.
"For there to be follow through, we actually need to see the data outperform even expectations," said Stephen Gallo, European head of FX strategy at BMO Capital Markets.
(Reporting by Tom Wilson Editing by Mark Heinrich and Chizu Nomiyama) ((T.Wilson@thomsonreuters.com; (44) 20 7513 5676; Reuters Messaging: firstname.lastname@example.org))