Sterling gains versus euro, driven by UK outperformance on vaccine rollout

Pound was flat against the stronger dollar

  

LONDON- The pound strengthened against a weaker euro on Tuesday, but was flat against the dollar, as investors focused on the outlook for reopening the UK economy from its lockdown.

Sterling has gained some 4.5% against the euro so far this year. Analysts say the move is largely due to the pace of the UK's vaccine rollout, which is one of the fastest in the world and aims to offer shots to all adults by the end of July.

Some lockdown restrictions in England ended on Monday, in contrast to much of Europe, where France and Germany are among the countries contending with a third wave of COVID-19 infections and hospitalisations. 

"With diverging paths on the vaccination side in the UK and the EU, EUR/GBP may continue to drift lower towards the key 0.85000 support this week," wrote ING strategists in a note. 

But Commerzbank strategist You-Na Park-Heger struck a more cautious note, writing to clients that "even if the UK emerges more quickly from the corona crisis than for example the EU a large share of the positive news is likely to be priced in already."

She said that risks relating to the economic recovery, including the collapse of British exports to the European Union following Brexit, mean that the Bank of England might continue to maintain its expansionary monetary policy for a long time. 

"Even though Sterling is going to be able to benefit from the projected end of the pandemic short-term, medium-term we remain sceptical about Sterling," she said.

At 1030 GMT, the pound was up 0.2% against the euro, at 85.32 pence per euro .

Elsewhere, the pound was flat against the stronger dollar, at $1.3757.

The dollar strengthened to a one-year high, after U.S. Treasury yields spiked to their highest in fourteen months. 

A combination of accelerating vaccine rollouts and massive U.S. fiscal stimulus has stoked fears of inflation in recent months, causing government bond yields around the world to rise, led by U.S. Treasuries.

The UK's 2-year gilt yield also rose in early trade on Tuesday, up as much as 3 basis points at the 8-day high of 0.112% GB2YR=RR . "The sterling outlook remains positive, the combination of continued vaccinations, lifting of lockdown restrictions and rising yields all converging to support the pound," said Stuart Cole, chief macro strategist at Equiti Capital.

Speculators reduced their net long position on the pound in the week to March 23. Equiti Capital's Cole said that this suggests a "pool of untapped potential support for sterling". 

Elsewhere, Britain's financial services minister said that Britain will focus first on regulating stablecoins, rather than the broader cryptocurrency market.

(Reporting by Elizabeth Howcroft Editing by Alexandra Hudson) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))

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