LONDON (Reuters) - Sterling rose against both the dollar and the euro on Thursday, testing the key $1.30 level, but Brexit-related risks and the economic fallout from the coronavirus pandemic kept investors cautious on the currency’s longer-term outlook.
The dollar, which has boosted cable by weakening so far this month, changed course and started strengthening in the Asian session.
But the pound still rose, touching new four-month highs against the U.S. currency and erasing some recent losses versus the euro.
“I wouldn’t say it’s typical risk-on/risk-off at the moment,” said Thu Lan Nguyen, senior FX strategist at Commerzbank.
“We are definitely seeing dollar strength at the moment - the dollar’s also up against most emerging market currencies for example, so it’s a not a typical risk-on move.”
“Overall the pound remains the underperformer in the G10 space so I would expect at some point that we see a little bit of a correction from time to time, but generally it has been quite weak,” she added.
Versus the dollar, the pound was at $1.3003 at 1015 GMT, up 0.1% since New York’s close. It was up around 0.4% versus a weaker euro, at 90.44 pence.
The pound is up 4.8% percent against dollar this month but only 0.2% against the euro.
“If we were to get some clarity...on where we are heading, if markets had some comfort the UK is heading for a managed exit (from the EU) we would see that cross move,” said Dean Turner, an economist at UBS Global Wealth Management, referring to euro versus sterling.
“The fact we haven’t seen much move in that cross suggests a risk premium around Brexit negotiations,” he said.
Investors are generally bearish on the pound as the UK and European Union have made little progress on post-Brexit trade arrangements. Britain left the EU in January and its transition period ends on December 31.
The EU’s banking watchdog said on Wednesday said that banks using Britain as a gateway to the EU must put in place their plans for serving EU customers before the transition period ends.
The outlook for the UK is also hampered by Britain’s high COVID-19 death toll.
British Health Secretary Matt Hancock said the number of coronavirus cases in the country is no longer falling, and is at best flat.
Deutsche Bank strategists wrote in a note to clients they expected to see sterling weakness over the rest of the year and said that sterling shorts are best expressed against the euro or yen.
Reporting by Elizabeth Howcroft, editing by Larry King, Kirsten Donovan