LONDON: The pound advanced towards $1.32 on Friday, on track for its biggest monthly rise in more than a decade as a broad-based dollar decline fuelled demand for the British currency.
But concerns of a second wave of infections, a weak economy and growing pressure to strike a Brexit trade deal before a transition period ends in December are prompting investors to become wary of the currency's prospects in coming months.
Bank of America Merrill Lynch strategists, who have been bearish on the pound, said the rest of 2020 could see weakness in the currency, especially as the period of August through December historically contains four negative months for sterling.
"The fortunes of the pound will increasingly be driven by the monetary policy stance, the ability of the economy to rebound from the global pandemic, and Brexit negotiations, which are effectively stuck in the mud," the strategists said.
On Friday, the pound rose 0.5% to $1.3159, its highest level since early March. On a monthly basis, it is up nearly 6%, its biggest rise since May 2009, according to Refinitiv data.
The pound's gains can be attributed to the dollar's losses. The greenback has fallen nearly 5% in July, with most of the drop coming in the last 10 days as new cases of coronavirus surged across several US states and some recent data pointed to an economic recovery losing steam.
British Prime Minister Boris Johnson said on Friday some lockdown easing planned for the whole of England would need to be delayed and the country's chief medical officer said any further opening up of the economy would raise infection rates.
Concerns over the struggling economy have prompted hedge funds to unwind their bullish bets on the pound in recent weeks while derivatives data signal more weakness ahead.
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