Sterling falls as dollar strengthens; short positions increase


The pound fell on Monday, driven by a stronger dollar due to worsening U.S.-China relations and seasonal flows as sterling enters what is typically one of its worst-performing months.

The United States made a renewed effort to blame China for the coronavirus outbreak. U.S. Secretary of State Mike Pompeo said on Sunday there was evidence the virus, which has killed nearly a quarter of a million people globally, was made in a Chinese laboratory.

The heightened tensions between the U.S. and China diminished market optimism about an economic restart as countries started to ease their lockdown restrictions. As investors flocked to the safe-haven dollar, cable fell back to levels seen last Wednesday.

"Last week the dollar did quite poorly because of month-end portfolio rebalancing flows and we're seeing some reversal of that," said Kenneth Broux, FX strategist at Societe Generale.

"And of course U.S.-China trade tensions do support the appeal of the dollar more generally," he added.

Against the dollar, the pound was last at $1.2431, having fallen 0.5% since the New York close on Friday. Sterling was broadly flat against the euro, at 87.96 pence .

Britain's defence minister said he agreed that China has questions to answer over the information it shared about the coronavirus outbreak, but that a post-mortem about its role should not come until the virus is under control.

Sterling gained 1.4% against the dollar in April, returning to a seasonal trend of a Spring bounce which it missed for the past two years.

But the bounce could be short-lived as the market is turning increasingly bearish on the pound. Total negative bets on sterling in the week to April 28 were at their lowest since December 2019, according to weekly futures data.

A lack of progress in Brexit negotiations and a fear that Britain is falling behind other European countries in terms of easing lockdown restrictions to allow for an economic recovery, are both weighing on the pound's long-term prospects, analysts say.

"The month of May is one of the worst months of the year for the pound. If you look at recent years it's the worst month after November for the pound so I think we have to be very careful in being too upbeat on sterling," Broux said.

This week, Johnson is due to review the lockdown. He must find a way to get the world's fifth largest economy back to work without triggering a deadly second wave of COVID-19 infections.

The Bank of England also meets on Thursday, when it will attempt to quantify the economic impact of the coronavirus crisis.

"The danger is that sterling's resistance or resilience will be tested by the very poor forecasts for growth this year... It could be quite a testing week for the pound," Societe Generale's Broux said.

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