LONDON: The pound's month-long rally came to a halt on Monday, as dollar strength pushed sterling back down towards $1.30, even as it remained flat versus the euro.
July was the pound's best month versus the dollar in more than a decade, although analysts said that had more to do with the dollar's weakness than the pound's strength.
The pound reached $1.3170 - its highest in nearly five months - on Friday, benefiting from investor caution about rising Covid-19 cases in the United States and data suggesting the economic recovery there was losing momentum.
But the rally ran out of steam on Monday, because the dollar index picked up as investors unwound some recent short positions following its 4% decline in July.
"Cable was ripe for some profit-taking after being overbought. And August is typically a very difficult month for risk-assets, including risk currencies like the pound," said Kenneth Broux, FX strategist at Societe Generale, who expects cable to edge down further toward $1.28 or even $1.27.
At 1520 GMT, cable was at $1.3043, down 0.3% since New York's close.
Versus the euro, it was broadly flat on the day, at 90.005 pence per euro.
For the pound's rally to resume, Broux said that either the dollar would have to keep weakening or there would have to be a positive surprise about the UK economy, both of which he says are unlikely.
UK PMI data was in line with estimates, showing a pickup in demand, orders growing for the first time in five months and optimism rising by the most in two years.
Two-thirds of British businesses say they are now "fully operational" after the coronavirus lockdown, up from half in June, according to a survey on Sunday.
But speculators' net short position on sterling got bigger in the week to July 28, weekly futures data showed.
Brexit, the UK's high Covid-19 death toll, and the risk of negative interest rates are all commonly cited as reasons for the market's bearishness.
Britain has the fourth-highest coronavirus death toll in the world, according to a Reuters tally of official statements.
Lockdown measures in parts of northern England were made stricter last week and some England-wide re-opening measures were postponed.
A "major incident" has been declared in the Manchester area of Britain, a local official said on Sunday, due to rising Covid-19 cases. Investors are cautious before the Bank of England meeting on Thursday, where analysts expect the policy rate and quantitative easing program to remain unchanged.
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