Pound Weakens as COVID Restriction Easing Sentiment Dissipates

The early burst of investor excitement over the potential loosening of COVID restrictions in China has dissipated, and the pound (GBP) fell on Monday even though sterling was still within striking distance of five-month highs versus the dollar (USD).

After China prepared to announce yet another batch of steps to loosen limits on activity, which investors interpreted as a probable departure from the government’s tight “zero COVID” policy, the dollar had a rough start to the day.

By midday in the London session, the risk rally that had propelled sterling to a session high of $1.2345 had mostly lost steam, resulting in a 0.3% decline in the value of the pound to $1.2244. Against the euro (EUR), the single currency dropped 0.4% to 86.13 pence.

In November, the pound increased 5.2% against the dollar, its best one-month performance since 2020. However, given the UK’s deteriorating economic outlook and the uncertain political environment, it may find it difficult to make much further progress.

Expectations that the Federal Reserve will hike rates by only 50 basis points this month after doing so by 75 basis points at each of its previous four meetings have contributed significantly to the recent decline in the value of the dollar.

Data released on Friday revealed that the US economy added more jobs than forecast in November, making it more difficult for the Fed to defend easing monetary tightening while inflation is still running at almost 8%.

As a result of cost-of-living pressures and uncertainty about the future of the economy, demand was constrained for the second month in a row, according to UK data released on Monday.

Pound to Remain on the Defence Ahead of the BoE Meeting

Meanwhile, according to the Commodity Futures Trading Commission’s (CFTC) weekly report, money managers continue to remain pessimistic about the pound. They continue to maintain a net short position, which means they are generally in the negative.

However, that position is also more than 50% smaller than the lows reached earlier this year, which may limit the potential for significant rallies, particularly as the Bank of England’s (BoE) meeting comes next week.