LONDON (Reuters) – Sterling rose on Monday, recovering from a three-week low during Asian trading, helped by a weaker dollar, hopes of a Brexit trade deal and expectations of better economic data.
Gains against the euro, however, were slashed after British industrial output recorded its biggest quarterly fall on record during the three months to June.
Britain has until the end of the year to sign a new trade agreement with the European Union, when a transition period following its exit from the bloc comes to an end. Although much remains to be discussed, both parties have signalled progress.
Last week, French President Emmanuel Macron told British Prime Minister Boris Johnson that France still supported reaching a deal and EU chief Ursula von der Leyen stressed “willingness to undertake all possible efforts to come to an agreement”.
The pound was last up 0.8% at $1.2445, having fallen earlier to $1.2337, its lowest since June 1. Against the euro, sterling was flat at 90.45 pence.
Graphic: Sterling rises – here
“In the two talks that Boris had last week there was real progress, both sides came out more optimistic and it seems that they are trying to compromise on all the open issues,” said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch, adding “the chances for a trade deal have improved.”
On top of that, “now it’s almost a given that we will see better data”, simply because recent economic indicators have been so dire due to the lockdown, Vamvakidis said.
Britain is expected to announce new measures on COVID-19 this week. The Daily Telegraph newspaper reported late on Saturday that Johnson would announce a new “one metre plus” rule to allow pubs and restaurants to accommodate more people.
Some analysts believe the pound should have risen more, especially after the Bank of England last week dampened expectations for negative rates and slowed the pace of quantitative easing in response to signs of economic recovery.
“Brexit and negative policy rate concerns have been two important factors which have weighed on the pound in recent months, so it was surprising that there wasn’t even a relief rally as downside risks have eased,” said Lee Hardman, currency analyst at MUFG.
Bank of England Governor Andrew Bailey said the central bank should start to reverse its quantitative easing asset purchases before raising interest rates on a sustained basis, a reversal of long-standing BoE policy.
Reporting by Olga Cotaga; Editing by Mark Potter and Alex Richardson