Sterling rises to new 3-year highs; speculators add to net long positions

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

LONDON (Reuters) - The pound rose on Monday, hitting fresh three-year highs against the dollar as bullish investors bet on the UK's vaccination rollout bringing about an economic recovery and Prime Minister Boris Johnson set out a schedule for easing the lockdown.

Sterling reached its highest levels since April 2018 when it crossed $1.40 on Friday. It has risen 2.9% against the dollar in 2021 and its rapid gains have led to talk of a possible correction.

The recent pound strengthening has been attributed to the UK's relative success in providing COVID-19 vaccinations, which is expected to help Britain's economy rebound from its biggest contraction in 300 years.

Some 17.7 million people, over a quarter of the 67 million population, have now received a first dose of a COVID-19 vaccine.

Relief that a no-deal Brexit was avoided at the end of 2020 is also supporting the pound, as is a lessening of fears that the Bank of England could introduce negative interest rates. The pound is still lower than before the country voted for Brexit in 2016.

Speculators added to their net long position for the third week running in the week to Feb. 16, CFTC positioning data showed. The market is at its most bullish in one year.

"We've clearly started to price in a lot of good news," said Ned Rumpeltin, head of European currency strategy at TD Securities.

"After such strong momentum and a very large move, you've got to be careful in terms of calling the top too prematurely but it does feel like the conditions are ripening for a broader correction to come through," he said.

"I wouldn't necessarily be a fresh buyer of pound at these levels. The risk-reward is increasingly skewed towards a correction at this stage."

Johnson set out a phased plan to end England's COVID-19 lockdown, offering a "cautious" approach to prevent a return to wholesale restrictions that have hobbled the economy.

At 1627 GMT, the pound was at $1.4054, up 0.4% on the day, having hit a high of $1.4068 before Johnson's speech.

Versus the euro, it was up around 0.2% at 86.405 pence per euro, having touched a one-year high earlier in the session.

"If the highs from April 2018 are taken out it will encourage expectations that the pound is adjusting to a new higher equilibrium now that Brexit risks have diminished," wrote MUFG currency analyst Lee Hardman in a note to clients.

"Whereas if those highs remain in place, market participants may then start to question whether recent pound strength is overshooting and thereby increasing the risk of a correction lower."

(Graphic: CFTC, https://fingfx.thomsonreuters.com/gfx/mkt/jznvnojaypl/CFTC.png)

(Reporting by Elizabeth Howcroft; Editing by Bernadette Baum, Ed Osmond and Richard Chang)