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Sterling eases off recent highs as investors temper vaccine optimism

·2-min read

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Jan 28 (Reuters) - The British pound retreated on Thursday from the multi-month highs it hit in the previous session, as investors tempered some of their optimism about COVID-19 vaccinations in the UK.

Sterling surged to its highest since May 2018 against the dollar in early London trading on Wednesday and later hit an eight-month high against the euro - a move analysts attributed to the UK's vaccine rollout being faster than that of Europe.

But the British currency gradually eased off these highs, falling overnight and opening lower on Thursday.

At 0850 GMT, it was down 0.4% against a stronger dollar, at $1.3638, compared to its Wednesday high of $1.3759.

Versus the euro, it was down around 0.3% at 88.67 pence per euro, having peaked at 88.135 in the previous session .

"We consider Sterling optimism to be excessive and we see the risk of disappointed expectations. We therefore urge caution about betting on further Sterling gains," wrote Commerzbank FX strategist You-Na Park-Heger in a note to clients.

"The markets are clearly ignoring that the current infection situation in the UK is still very tense," she said.

"There is a high degree of uncertainty as it is difficult to say how the pandemic is going to develop short-term and when and how quickly the restrictions can be eased," she added.

Britain has the world's fifth highest death toll from COVID-19 and Prime Minister Boris Johnson has indicated that the strict COVID-19 lockdown in England will last until March 8.

The pound has strengthened since a last-minute Brexit deal was reached in December 2020. But Commerzbank's Park-Heger said that the impact of Brexit on the UK's economy is still unknown.

The possibility of the Bank of England cutting rates presents another downside risk for the pound, she said.

Britain said on Thursday that it must receive all of the COVID-19 vaccines it had ordered and paid for, after some European Union politicians asked drugmaker AstraZeneca to divert doses from the UK to make up for a shortfall in supplies.

AstraZeneca was the top drag to the FTSE 100 index for the second consecutive day.

But some analysts took a positive tone: "The political jitters between the EU, AstraZeneca and the UK don’t appear to have a negative impact on GBP. We look for further EUR/GBP decline over the course of the year as the UK vaccination advantage (and its likely earlier recovery) and GBP undervaluation vs EUR are to benefit sterling," wrote ING analysts in a note to clients. (Reporting by Elizabeth Howcroft, Editing by William Maclean)