Sterling dips as UK vaccination drive faces bump in the road

By Joice Alves

LONDON (Reuters) - Sterling fell on Wednesday after the European Union raised the prospect of blocking COVID-19 vaccine shipments to countries, such as Britain, with higher inoculation rates and to those not exporting doses.

Bets that Britain's rapid vaccination drive would lead to a faster reopening of its economy propelled the pound above $1.42 in February.

But a firmer dollar on rising bond yields and the risk of the EU banning COVID-19 vaccine exports to Britain, which relies heavily on imports for its inoculation campaign, knocked sterling from its perch as the best-performing G10 currency.

The European Commission, which oversees trade policy for the 27 EU members, set out a proposal to ensure planned exports by drugmakers do not threaten already reduced EU supply.

"The UK’s vaccination campaign faces a bump in the road owing to the EU’s plans to restrict vaccine exports," said Shaun Osborne, Chief FX Strategist at Scotiabank.

At 1650 GMT, the pound was down 0.2% to $1.3726 against the dollar, after falling to its lowest since Feb. 5 of $1.3675. Versus the euro, it was flat at 86.20 pence.

Adding pressure to the pound, data showed on Wednesday a surprise decline in inflation in Britain.

British consumer price inflation unexpectedly fell to 0.4% in February from 0.7% in January, reflecting the biggest annual drop in clothing prices since 2009. A Reuters poll forecast it would edge up to 0.8%.

After the release of the inflation numbers, British two-year government bond yields hit a one-month low, while sterling fell to an almost seven-week low versus the dollar and to its lowest since March 5 against the euro.

The weaker-than-expected inflation data "should serve as a reminder that reflation is still in the early stages in the UK," said, Jane Foley, head of FX strategy at Rabobank.

"The optimism may be a little too much, too soon".

But keeping a portion of that optimism alive, another set of data showed a rush of new orders by businesses anticipating an easing of Britain's lockdown prompted a much stronger rebound for UK companies than expected in March.

The flash IHS Markit/CIPS UK Composite Purchasing Managers' Index rose to a seven-month high as Britain's vaccine rollout bolstered confidence among businesses.

(GRAPHIC: Sterling 24 March - https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqldynpx/Sterling%2024%20March.png)

(Reporting by Joice Alves, Editing by Jane Merriman and Mark Potter)