The pound rallied on Tuesday morning, hitting a one-week high against the euro.
Sterling rose 0.3% against the eurozone currency (GBPEUR=X) to hit €1.1142 in early trade. It marked the highest level since 4 January.
The pound was also gaining on the dollar (GBPUSD=X), up 0.3% to $1.3544. However, cable was only at levels seen last Friday and was losing momentum as the trading day shifted from Asia to Europe.
“From a technical perspective, cable has found some support after a worsening Covid situation, negative rate talk and a stronger dollar saw a sell off into the start of the year,” said Adam Vettese, a market analyst at eToro.
“Whilst rising yields are helping push the dollar up, talk of more fiscal stimulus, which is expected, will keep a cap on gains and as such it seems buyers have found GBP attractive at these levels. Over 2 million people vaccinated in the UK being announced may also be contributing to sentiment.”
Dutch bank ING reiterated its “rather optimistic near-term stance on GBP” on Tuesday, arguing that “the majority of bad news appears to be already in the price.”
Traders will be watching a speech by deputy Bank of England governor Ben Broadbent on Tuesday morning. Broadbent, who is a member of the central bank’s Monetary Policy Committee (MPC), is due to speak at 10am.
Investors will be looking for any signals that negative interest rates could be on the horizon. The Bank of England began preparatory work for negative interest rates last year and has said it could deploy them as early as spring 2021 if needed.
Silvana Tenreyro, an external member of the MPC, gave a speech in favour of negative interest rates on Monday. Tenreyro, who had already signalled her support for the policy, said negative interest rates wouldn't damage the UK banking system and have been shown to be effective in stimulating growth.
Sterling could go lower if Broadbent suggests he too is in favour of negative interest rates. The Bank of England’s next monetary policy meeting is on 4 February.
“Another sparse data schedule suggests that we may be in for another quiet day on FX markets,” said Daniel Noonan, an economist at AIB. “Thus, developments regarding Covid-19 are likely to remain the main source of direction for the main currency pairs.”
Watch: What are negative interest rates?