LONDON (Reuters) – Sterling was set to end the day flat against the euro and down against a stronger dollar on Wednesday, as optimism that a vaccine against COVID-19 would bolster the UK economy was tempered by a lack of progress in Brexit negotiations.
Global markets surged this week after Pfizer Inc announced on Monday that its experimental COVID-19 vaccine was more than 90% effective based on initial data from a large study.
The pound benefited as investors judged that a vaccine would be a particular boon to the UK, which has seen its economy ravaged by the coronavirus.
“Since Britain has been disproportionately hit by the virus, it will be disproportionately helped by a vaccine,” wrote Marshall Gittler, head of investment research at BDSwiss Group.
Euro-sterling tumbled to hit its lowest in six months at 88.61 pence per euro at 1153 GMT, although it reversed this later in the session.
By 1632 GMT, the pound was broadly flat versus the euro at 89.09 pence, and down 0.6% on the day against a stronger dollar, at $1.3198 – still up on the week.
ING strategists wrote in a note to clients that Brexit remained the key driver for the pound.
Britain left the European Union in January and both sides are negotiating a trade deal for the end of the transition period on Dec. 31.
A deal is unlikely to be reached this week and talks might go into next week, an Irish minister said on Wednesday, confirming a Reuters report that negotiators were set to miss their mid-November deadline for a deal.
Pound traders have long feared that the economic fallout from a second nationwide lockdown, combined with the threat of a no-deal Brexit, could push the Bank of England to introduce negative rates in January.
But a possible vaccine could go some way to mitigate the risk of negative rates, said Kit Juckes, head of FX strategy at Societe Generale, who noted that the G10 currencies which are down on the week versus the dollar are those with negative rates.
“It is a shift and the UK-negative was doubling up on pandemic and no-deal Brexit. If you reduce either side of that, it’s not as exceptionally dreadful as it was before,” he said. “If we don’t get a deal, the chances of negative rates are maybe smaller now.”
Money markets are now pricing in negative interest rates in Britain by August 2021 compared with May last week.
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