May 4, 2020 / 10:13 AM / 22 days ago

UPDATE 2-Sterling weakened by seasonal factors, dollar strength; short positions increase

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

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates prices, adds dollar-sterling swaps)

By Elizabeth Howcroft

LONDON, May 4(Reuters) - Sterling fell on Monday, driven by a stronger dollar due to worsening U.S.-China relations and seasonal flows as the UK currency enters what is typically one of its worst-performing months.

The United States over the weekend renewed its criticism of China’s initial handling of the coronavirus outbreak, hurting market sentiment and causing sterling to fall as investors flocked to the safe-haven dollar.

Britain’s defence minister said he agreed that China has questions to answer over the information it shared about the outbreak of the virus.

“Last week the dollar did quite poorly because of month-end portfolio rebalancing flows and we’re seeing some reversal of that,” said Kenneth Broux, FX strategist at Societe Generale.

“And of course U.S.-China trade tensions do support the appeal of the dollar more generally,” he added. The dollar is seen as a safe haven during times of economic turmoil.

Against the dollar, the pound was last at $1.2423, having fallen 0.6% since the New York close on Friday. Sterling was broadly flat against the euro, at 87.85 pence .

Although the dollar-funding shortage of mid-March has largely dissipated, the 3-month pound-dollar cross-currency basis swap has returned to negative territory in the past week, indicating a renewed increase in demand for dollars

British financial institutions bid for and received the highest volume of U.S. dollars since April 1 at Monday’s daily Bank of England auction for seven-day dollar funds.

Sterling gained 1.4% against the dollar in April, returning to a seasonal trend of a Spring bounce which it missed for the past two years.

But the bounce could be short-lived as the market is turning increasingly bearish on the pound. Total negative bets on sterling in the week to April 28 were at their lowest since December 2019, according to weekly futures data.

“The month of May is one of the worst months of the year for the pound. If you look at recent years it’s the worst month after November for the pound so I think we have to be very careful in being too upbeat on sterling,” Broux said.

This week, British Prime Minister Boris Johnson is due to review the nationwide lockdown. He must find a way to get the world’s fifth largest economy back to work without triggering a deadly second wave of COVID-19 infections.

The Bank of England meets on Thursday, when it will attempt to quantify the economic impact of the coronavirus crisis.

Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said that in addition to seasonal factors and the prospect of downbeat economic forecasts from the Bank of England, sterling was also being held down by uncertainty about Brexit negotiations and when UK lockdown measures would be eased.

“It’s very easy to add up a multitude of negatives and come up with the conclusion that sterling should be cheaper,” he said.

“If you look at the way the speculative market has been building sterling shorts or moving away from sterling over the course of the last eight weeks it does underline that that seems to be the path of least resistance,” he said.

“More likely than not we’re going to be heading towards sub-$1.22 in the not-too-distant future.”

Reporting by Elizabeth Howcroft; Editing by Angus MacSwan and Susan Fenton

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