Sterling slips to six-week low on EU vaccine tensions

Ritvik Carvalho
·3-min read
FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

By Ritvik Carvalho

LONDON (Reuters) -Sterling skidded to a six-week low against the dollar on Tuesday as the EU considers banning COVID-19 vaccine exports to Britain, which relies heavily on imports for its vaccination drive.

After falling far behind post-Brexit Britain and the United States in rolling out vaccines, European Union leaders are due to discuss a possible ban on exports to Britain on Thursday.

Britain demanded on Monday that the EU allow the delivery of COVID-19 vaccines it has ordered as tensions mounted and Brussels pointed an accusing finger at AstraZeneca.

Sterling was down 0.6% against the dollar at $1.3782 by 1545 GMT after hitting $1.3752 in morning trade, its lowest since Feb. 9.

Against the euro, the pound traded flat at 86.08 pence, after falling to 86.45 pence, its lowest against the single currency in over two weeks.

A month ago, bets that Britain's rapid vaccination drive would lead to a faster reopening of an economy that suffered its worst annual contraction in 300 years propelled the pound as much as 4.2% higher against the dollar on the year.

However, those bets are starting to unwind, and the pound has fallen from its perch of being the best-performing G10 currency as the dollar has strengthened on rising bond yields.

"One of the reasons why sterling has strengthened this year is the successful vaccine rollout," said Lars Sparresø Merklin, senior analyst at Danske Bank.

"We do not think the EU will implement an export ban (because it may turn out to hit themselves as well) but it is a topic to watch," he added.

Although some are upbeat overall on sterling, the size of the bullish position has shrunk over the past two weeks and speculators reduced their net long position on the pound versus the dollar in the week to March 16, CFTC data showed.

"The pound is one of the most correlated risk-currencies and one of the most overbought on the top of that," said Valentin Marinov, head of G10 FX research at Credit Agricole.

"It is only natural to see it underperforming at a time when investors are starting to question the resilience of the risk rally."

Britain's jobless rate unexpectedly fell to 5.0% in the three months to January, when the country entered a new COVID lockdown, official figures showed on Tuesday, below forecasts of a rise to 5.2% in a Reuters poll.

Investors will watch the speeches of three Bank of England officials - Governor Andrew Bailey, Deputy Governor Sir Jon Cunliffe and Chief Economist Andy Haldane.

"BoE speakers will be watched this week, but ahead of the May Inflation Report it is unlikely that strong incentive will be given. A little further backtracking in the pound cannot be ruled out," said Jane Foley, head of FX strategy at Rabobank.

Investors will also be watching a vote of no confidence in Scottish National Party (SNP) leader Nicola Sturgeon in the Scottish parliament on Tuesday.

A Scottish parliamentary election will take place in May, and Sturgeon has vowed to press for a second referendum on independence from the United Kingdom if the SNP wins an absolute majority.

Scots voted 55% to 45% to stay in the UK in a 2014 referendum, but the SNP says Scotland should hold another vote due to Brexit. Britain voted in a 2016 referendum to leave the European Union, but a majority of Scots wanted to remain.

(Reporting by Ritvik Carvalho;Editing by Gareth Jones, Alexander Smith and Dan Grebler)