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UPDATE 1-Growing risk appetite and weekend vaccine rollout support sterling

25 Jan 2021 / 19:58 H.

    * Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

    * Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Adds chart, comments, updates rates and news)

    By Joice Alves

    LONDON, Jan 25 (Reuters) - Sterling strengthened on Monday as investors returned to risk assets on hopes for more stimulus in the United States, while Britain's COVID-19 vaccine rollout over the weekend also offered support.

    After hitting a 32-month high against the dollar last week, sterling fell on Friday as a set of fresh figures showed Britain's third national lockdown sparked the sharpest drop in business activity since May, while retail sales remained weak in December.

    But the optimism about a $1.9 trillion fiscal stimulus plan to help revive the U.S. economy sparked interest for riskier assets on Monday, benefiting the British currency.

    The pound was at $1.3687 against the safe-haven dollar at 1139 GMT, after hitting $1.3724 in morning trade, recovering from a slide to $1.3636 the previous session.

    "It appears sterling is performing well today under a return to a more risk on preferred market backdrop," said Neil Jones, head of FX sales at Mizuho Bank, adding that risk appetite puts the dollar "on the back foot, forcing the pound higher".

    Positive news around the UK COVID-19 numbers and on the inoculation programme also offered comfort, analysts said.

    Britain's vaccine rollout gathered pace on Saturday, with 5.9 million people now having had a first dose.

    British Prime Minister Boris Johnson said he is looking at the potential to relax some COVID-19 measures before mid-February.

    "Investors may start to sense we are turning the corner," Mizuho's Jones added.

    Against a weakening euro, sterling edged 0.2% higher to 88.82 pence, not far from an 8-month high of 88.30 pence hit last week, after an Ifo economic institute survey showed German business morale slumped to a six-month low in January.

    "The euro is under a bit of downward pressure after the weaker than expected Ifo," said Adrian Schmidt, head of FX strategy at Continuum Economics, adding that in the longer run, "the relative weakness of Europe seems likely to drag GBP lower".

    (Editing by Kirsten Donovan and Nick Macfie)

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