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Market Update

Sterling jumped above $1.42 on Wednesday, coming within touching distance of $1.43, while also reaching a year’s high against the euro as analysts retained their bullish views on the currency.

The pound is the best-performing G10 currency this year, up nearly 4% against the dollar and 3.2% against the euro as investors bet Britain’s rapid COVID-19 vaccine rollout will lead to a quicker economic rebound.

Analysts also point to relief over avoiding a “no-deal” Brexit with the European Union at the end of last year as benefiting the pound, with the market looking through short-term headwinds and disruption.

Seemingly GBP is benefiting from a positive vaccine rollout and short-term Brexit adjustment problems disappearing, which also from a relative rates perspective is supporting GBP.

Also supporting sterling has been a pushing back of market expectations of negative rates by the Bank of England. BoE Governor Andrew Bailey is due to testify before the UK parliament’s Treasury Committee today, a day after his U.S. counterpart, Federal Reserve Chair Jerome Powell, testified before the U.S. Senate Banking Committee.

Bailey … will face a similar challenge to that faced by Powell yesterday: delivering a cautious and dovish message despite clearly encouraging recovery prospects.

Any reference to negative rates will, as usual, have a magnified market impact, but markets have now moved away from the negative interest rate policy narrative in the UK and some generic reference to openness to more monetary stimulus should fall short of revamping these expectations. Any setback in the GBP rally –- still fuelled by solid vaccination progress — should be short-lived.

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