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Sterling stabilises; EU and UK fall out over vaccine comments

Elizabeth Howcroft
·2-min read
FILE PHOTO: A picture illustration of U.S. dollar Swiss Franc British pound and Euro bank notes

By Elizabeth Howcroft

LONDON (Reuters) - The pound was little changed on Wednesday, slipping below $1.39 and edging up against the euro, still supported by the UK's vaccine success and optimism about an economic recovery.

The dollar was steady, having recovered some of its losses from the previous session. Global stocks climbed after a report on U.S. consumer prices eased some recent concerns about inflation.

Sterling has strengthened so far in 2021, climbing as high as $1.424 in February. Analysts attribute the gains to the UK's relative success in COVID-19 vaccinations, plans to loosen lockdown measures, a lessening of negative interest rate expectations and relief that a no-deal Brexit was avoided at the end of 2020.

But the gains versus the dollar have eased in recent weeks and at 1634 GMT on Wednesday, cable was flat on the day at $1.3892.

The pound continued to edge up against the euro, at 85.63 pence per euro at 1634 GMT. Euro-sterling has lost more than 4% so far in 2021.

"It’s all about the broader risk dynamics and ultimately that’s still going to be the arbiter of sterling performance (today)," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

"If we can see some degree of stabilization in terms of U.S. yields and we don’t see that yield spike encouraging an additional risk sell-off then I think sterling will remain reasonably well-supported," he said.

Britain has Europe's highest COVID-19 death toll and has recorded its biggest economic contraction in 300 years. But its vaccine rollout is one of the fastest in the world and has seen more than 40% of adults receive their first shot.

ING analysts wrote in a note to clients that euro-sterling was approaching "stretched short term undervaluation levels" and that investors should expect "periods of frequent overshoots into overvalued GBP territory" given the boost the currency has had from the rapid vaccine rollout.

In the latest in a series of disputes between Britain and the European Union, a senior EU diplomat in London was summoned to a meeting at the British foreign ministry as the two sides fell out over comments about COVID-19 vaccines.

European Council President Charles Michel said on Tuesday that Britain had an outright ban on exporting COVID-19 shots. A UK government spokesperson said that this was not true.

Although the pound did not seem affected, CIBC's Stretch said that tensions were worth keeping an eye on in case they impact the European Parliament's plans to vote on the Brexit deal, which is currently only in place on a provisional basis.

(Reporting by Elizabeth Howcroft; Editing by Hugh Lawson)