Pound Tumbles as Virus Resurgence Clouds U.K. Recovery Hopes

A British ten pound banknote sits in this arranged photograph in London, U.K. (Photographer: Hollie Adams/Bloomberg)

Pound Tumbles as Virus Resurgence Clouds U.K. Recovery Hopes

The pound dropped to the lowest level against the dollar in more than two months as a surge in coronavirus cases dented mounting confidence in the U.K.’s recovery.

Sterling fell as much as 0.9% to $1.3795, its weakest since April 16, after a hawkish Federal Reserve strengthened the dollar this week and the U.K. recorded more than 11,000 new cases of the disease. Pound sentiment for the coming month is at its most bearish since April, according to risk reversals, a gauge of market positioning.

Pound Tumbles as Virus Resurgence Clouds U.K. Recovery Hopes

“Some of the optimism stemming from the U.K.’s early vaccine roll-out is slipping,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “An increase in virus cases is not good news clearly. Among other factors, this means that the U.K. is excluded from the European Union’s safe travel list.”

It’s a setback for a currency that has risen about 1% this year, lagging only the Canadian dollar in the Group-of-10 economies. The U.K.’s successful vaccination effort and speculation the Bank of England would hike interest rates sooner than its peers have both boosted sterling.

“Rising case numbers are certainly not helping sentiment,” said Jeremy Stretch, head of G-10 foreign-exchange strategy at Canadian Imperial Bank of Commerce.

Pound Probabilities

According to Bloomberg’s options pricing model, there is now a 21% chance that pound drops to $1.20 by the end of the year, the lowest level since March 2020. That compares with a 10% probability seen before Wednesday’s Fed decision.

The pound has fallen by more than 1% since the Fed’s accelerated its expected pace of policy tightening. Increased demand for pound puts in the front end suggests options traders see little risk for a hawkish shift next week by the Bank of England.

Pound Tumbles as Virus Resurgence Clouds U.K. Recovery Hopes

The British currency also took a knock after the volume of goods sold in stores and online in May fell 1.4%, according to data published Friday, following an unprecedented 9.2% surge in April. That said, the decline was driven by decreased spending at supermarkets as the government allowed restaurants and bars to reopen.

Also weighing on sentiment was a defeat to the Conservatives at a special parliamentary election to the Liberal Democrats, in a district northwest of London that had been a stronghold for the ruling party.

Yet the pain for the pound could prove short-lived, according to Ned Rumpeltin, head of foreign-exchange strategy at Toronto-Dominion Bank.

“The dust does appear to be starting to settle from this week’s Federal Reserve surprise and we have the BOE coming up next week,” he said. “That could see some of the downside pressure start to ease and we wouldn’t be surprised to see buying interest emerge with more confidence,” if the pound declines toward $1.38, Rumpeltin added.

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