# Sterling slips as boost from new China COVID rules fades
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-12-05
Category: TRADING
Category URL: https://financedigest.com/category/trading
Meta Title: Pound slides as investor enthusiasm wanes over China COVID
Meta Description: The pound slid on Monday as investor enthusiasm over potential China COVID restrictions easing faded. Updates on sterling and dollar performance.
URL: https://financedigest.com/sterling-slips-as-boost-from-new-china-covid-rules-fadeshtml

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By Amanda Cooper

LONDON (Reuters) – The pound slid on Monday, as an initial jolt of investor enthusiasm over signs of possible loosening in COVID restrictions in China faded, and sterling still held within sight of five-month highs against the dollar.

The dollar started out the day on the backfoot, after China prepared to unveil another round of measures to ease restrictions on activity, which investors took as a sign of a potential shift in the government’s tough zero-COVID policy.

By late morning in London, much of the risk rally that took sterling to a session high of $1.2345 had run out of steam, leaving the pound down 0.3% at $1.2259. It fell 0.4% against the euro to 86.13 pence.

[Sterling rose by 5.2% against the dollar](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") in November, its strongest one-month performance since 2020, but it could struggle to make much more headway, given an increasingly gloomy economic picture in Britain and a tricky political landscape.

For sterling, it could be a case of ‘too much, too soon’,” Rabobank [head of currency strategy Jane Foley said on the pound’s gains](https://www.financedigest.com/dollar-heads-for-first-weekly-gain-since-february.html "Dollar heads for first weekly gain since February") last month.

Much of the [dollar’s recent weakness has also been driven by expectations the Federal Reserve will deliver a rate rise of just 50 basis points this month](https://www.financedigest.com/european-shares-hit-nine-month-high-dollar-wobbles-after-powell-remarks.html "European shares hit nine month high, dollar wobbles after Powell remarks"), having raised rates by 75 basis points at each of its last four meetings.

Data on Friday showed the U.S. economy [created more jobs](https://www.financedigest.com/italy-jan-jobless-rate-edges-up-to-7-9-with-35000-jobs-created.html "Italy Jan jobless rate edges up to 7.9%, with 35,000 jobs created") than expected last month, making it harder for the Fed to justify slowing the pace of monetary tightening, when inflation is still running at almost 8%.

Meanwhile, UK data on Monday showed [Britain’s services](https://www.financedigest.com/britain-seeks-to-boost-banking-services-from-fintechs.html "Britain seeks to boost banking services from fintechs") sector shrank slightly for a second month in November, as cost-of-living pressures and uncertainty about the economic outlook squeezed demand, a survey showed on Monday.

Money managers are still bearish towards sterling, according to weekly data from the [Commodity Futures Trading](https://www.financedigest.com/a-brits-guide-to-understanding-commodity-trading.html "A Brit’s Guide to Understanding Commodity Trading") Commission (CFTC). They still hold a net short position – meaning they’re negative generally. But that position is also more than 50% smaller than the depths seen earlier this year, which could leave less room for big rallies, especially with the [Bank of England](https://www.financedigest.com/bank-of-england-consults-on-remaining-basel-bank-capital-rules.html) meeting next week.

We struggle to see cable [extend its rally](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") to $1.25 and beyond, but it will undoubtedly be primarily a dollar/risk sentiment story driving the pair before the BoE meeting. A [contraction below $1.20 seems more appropriate given global](https://www.financedigest.com/incentive-fm-group-wins-contract-with-global-events-company.html "Incentive Fm Group Wins Contract With Global Events Company") and UK macro fundamentals,” ING strategist Francesco Pesole said.

To boot, the economy is facing a wave of [strikes from public sector workers this month in protest over pay](https://www.financedigest.com/in-inflation-hit-germany-massive-strike-over-pay-to-cripple-transport.html "In inflation-hit Germany, massive strike over pay to cripple transport") as households and businesses face a cost-of-living crisis.

Prime Minister [Rishi Sunak](https://www.financedigest.com/british-pm-rishi-sunak-pledges-further-action-on-strikes-to-protect-lives.html "British PM Rishi Sunak pledges further action on strikes to ‘protect lives’"), in power for just over a month, faces a raft of problems, including a possibly lengthy recession in the run-up to an election that opinion polls suggest the Conservatives will lose.

[Investors initially cheered](https://www.financedigest.com/despite-the-headwinds-investors-have-important-reasons-to-be-cheerful.html "DESPITE THE HEADWINDS, INVESTORS HAVE IMPORTANT REASONS TO BE CHEERFUL") the appointment of Sunak and his new finance minister, Jeremy Hunt, as the two brought much-needed stability to UK markets.

But that optimism is fading, which could ultimately spell more weakness for the pound.

If you look at UK fundamentals – a [strike a day in the month of December](https://www.financedigest.com/uks-december-shopper-numbers-defy-inflation-and-rail-strikes-hit.html "UK’s December shopper numbers defy inflation and rail strikes hit"), we’ve seen a slew of Tory MPs not standing again because they don’t want to be in opposition,” Rabobank’s Foley said.

“What that says to me is: a) the economic news is pretty grim and b) it’s going to be very difficult for Sunak not to manage just the economy, but his own party,” she said.

(Reporting by Amanda Cooper; Editing by Bernadette Baum)


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