By Sujata Rao
LONDON (Reuters) - Sterling vaulted above $1.34 for the first time in a month on Thursday and also scaled a one-month high against the euro, surfing a general uptick in risk sentiment and a steep rise in Britain's short-dated government bond yields.
UK businesses posted the weakest quarterly growth since the three months to April when lockdowns were in effect, the Confederation of British Industry (CBI) said.
But that was offset by an announcement from AstraZeneca that a three-dose course of COVID-19 vaccine was effective against Omicron. Rivals Pfizer-BioNTech and Moderna, also say a third shot of their vaccines works against Omicron.
Coming after reports that Omicron patients are less likely to need hospitalisation, the news raised hopes that governments may not need to widen restrictions on activities.
Britain also cut its COVID-19 self-isolation period to seven days from 10 days for those who test negative two days in a row..
By 1530 GMT, the pound was up 0.5% against the dollar at $1.34190, just off a one-month peak of $1.34370 hit earlier. Against the euro, it was up 0.55% at 84.360 pence having risen as high as 84.16 pence.
Analysts pointed to steep rises in UK gilt yields, outstripping German and U.S. peers, with 5- and 10-year yields up five basis points (bps) on the day as markets moved to factor a 100 bps rise in British interest rates by end-2022.
Nomura strategist Jordan Rochester noted especially the pick-up in UK "real" or inflation-adjusted yields. British 5-year real yields jumped 14 bps on the day, bringing gains since mid-December to around 60 bps. U.S. and German counterparts have flatlined in this period, Refinitiv data shows
"If you're looking for why sterling remains bid, it's the continued pickup in real yields," Rochester said, though he suggested the moves were down to Christmas volumes "rather than the start of a new uptrend" with the positive impulse from UK rate hikes already largely priced in.
The pound has risen 1.6% and 1.2% against the dollar and euro respectively since Dec. 15, a day before the Bank of England hiked interest rates.
Scotiabank analysts pointed out 2-year gilt yields were up 30 bps in the past 10 days, while the Bund equivalent had risen less than five bps. That's seen the spread between the two approach the widest since August 2019
"As we had expected, the move in yields is pulling euro/sterling toward the 84 pence level," they said.
Graphic: Real yields https://fingfx.thomsonreuters.com/gfx/mkt/egpbkorzmvq/real.PNG
(Reporting by Sujata Rao Editing by Bernadette Baum and Mark Potter)