Sterling benefited as the dollar weakened, rising 0.3%, but was flat against the euro on Wednesday, as the impression grew that the rest of the world was handling the coronavirus pandemic better than the United States.
The pound rose to above $1.29 to a five-month high of $1.2977, close to its pre-coronavirus levels. It was unchanged versus the euro at 90.66 pence.
Overnight implied volatility gauges in sterling/dollar rose to a month-and-a-half high of nearly 11, suggesting traders were prepared for some price turbulence on Wednesday.
One reason for the pound's gains may have been that money managers were rebalancing their currency exposures after equities fell in the UK in July, said Marshall Gittler, head of investment research at BDSwiss Group. He noted that "hedge funds were particularly active buyers of sterling."
Others said the moves were most likely caused by a broad weakening in the U.S. dollar.
"It's all about growth, and growth expectations in Europe have started to outperform the U.S. I don't see that really changing unless there's a big second wave in Europe," said Jordan Rochester, currency strategist at Nomura.
"You've got fiscal solidarity from the European, you've got a fiscal stimulus from the Germans, you've got better mobility statistics in Europe. It's all set up for pretty good 2021 for Europe versus the U.S.," he said. "I can see $1.30 being broken."
In addition, Britain said on Wednesday that it had signed a supply deal for up to 60 million doses of a possible COVID-19 vaccine. As one the hit hardest by the coronavirus, Britain could get back on its feet if a vaccine was widely available. (Reuters)