Sterling keeps momentum as risk sentiment improves

Demand for riskier assets on Tuesday kept sterling close to the two-month high it reached the day before, with investors also hoping this week’s Brexit talks will result in a deal.

News on Monday that AstraZeneca’s potential COVID-19 vaccine could be up to 90% effective boosted sentiment. British Prime Minister Boris Johnson said on Monday he hoped almost all Britons at high risk from COVID-19 would be vaccinated by Easter.

England will introduce a new system on Dec. 15 allowing passengers arriving from high-risk countries to take a COVID-19 test after five days of quarantine and to be released from any further self-isolation if they test negative.

In addition, the one-month full lockdown in England is due to end on Dec. 2.

Still, Britain is likely to suffer some long-term economic scarring due to the pandemic, Bank of England policymaker Jonathan Haskel said.

Sterling was stronger in early trading, but gave back some gains after data showed British retail sales have fallen by the most since June during this month’s lockdown across the bulk of the country.

Month-end investment flows have curtailed gains in sterling and the pound should be trading higher,

“I think the pound could continue the gains next month, depending of course on how the Brexit talks go.”

The pound was last up 0.2% at $1.3352, close to $1.3396, its highest since Sept. 2, reached on Monday. It was earlier at $1.3380. If it were to rise above $1.3481, the surge would propel it to nearly a one-year high.

Versus the euro, moves were more contained, with the pound down 0.1% at 88.98 pence.

London and Brussels this week continue their negotiations over their future trading relationship, though time is now running very short as Britain’s post-Brexit transition period ends in fewer than six weeks.

Without an agreement, Britain would revert to trading with the EU on World Trade Organisation rules, an outcome both sides believe would disrupt their economies.

Most investors believe a deal will be clinched, even if it is a bare-bones one that leaves some discussions for later.

Traders were buying more put sterling options - as seen in the one-month risk reversals levels - which usually means more people are expecting the pound to fall than to rise in the next few weeks. The levels are not as low as they were in mid-September, though.

Britain’s car industry body warned a failure to clinch a Brexit deal could cost the sector 55.4 billion pounds ($74 billion) in tariffs by 2025 and undercut its ability to develop the next generation of zero-emission vehicles.

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