Sterling steadies vs dollar, euro after profit-taking knock

By Tom Wilson

LONDON (Reuters) -Sterling steadied against the dollar and euro on Thursday, recovering after a bruising bout of profit-taking earlier in the week.

The pound fell 1.2% against the dollar and 1.7% against the euro between Tuesday and Wednesday as investors took cash off the table after a strong first quarter for the British currency.

But by 1500 GMT on Thursday, sterling was up 0.15% against the dollar at $1.3760, after touching its lowest this month earlier in the day as the dollar traded near its lowest in two weeks versus major peers. [nL1N2M10OL]

Against the euro, the pound fell 0.1% to 86.49 pence per euro, following two days of losses against the single currency since September - a fall traders said was amplified by a squeeze of euro-pound short positions.

Traders were largely optimistic over the pound's near-term prospects after a strong start to the year. But some urged caution as markets have already priced in positive news for sterling.

Sterling's pullback was "exaggerated," ING analysts wrote, adding that they were "constructive" on the pound, citing Britain's relatively fast COVID-19 vaccine programme.

Expectations of an economic rebound in Britain, spurred by rapid vaccinations, helped sterling to record its best quarter since 2015 versus the euro. Falling expectations of negative interest rates also helped.

Britain has surged ahead of the rest of Europe in the race to inoculate its population, with almost half of its citizens receiving a first dose. But supply issues from its main Oxford-AstraZeneca vaccine have slowed progress in recent days.

Some market players said the pound may struggle to maintain its strong start to the year.

"We are starting what's likely to be much more challenging quarter for sterling," said Adam Cole, chief currency strategist at RBC Capital Markets, with positive news on vaccines and the lower risk of negative rates already priced in.

Others said Britain's economic performance in the next quarter would be a key factor. With infection numbers falling, a planned partial re-opening of the economy is due next week.

"For there to be follow through, we actually need to see the data outperform even expectations," said Stephen Gallo, European head of FX strategy at BMO Capital Markets.

(Reporting by Tom Wilson;editing by Mark Heinrich, Chizu Nomiyama, Larry King)