June 10, 2020 / 9:11 AM / 24 days ago

Sterling rises as dollar falls, headwinds persist

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

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Olga Cotaga

LONDON, June 10 (Reuters) - Sterling rose against the weaker dollar and stayed flat versus the euro on Wednesday as Brexit uncertainty, the prospect of negative interest rates and Britain's large coronavirus death toll still weighed on the currency.

A gauge of sterling overnight implied volatility rose to a 2-1/2-month high of 11.50, suggesting traders expected higher-than-usual swings in the British currency on Wednesday .

Infection rates from the virus have been falling and Britain said it will reopen shops on Monday together with zoos and drive-in cinemas.

But the fact that more 50,000 people have died from COVID-19, the disease caused by the virus, left companies struggling and investor confidence weak.

The initial shock of the pandemic to Britain's financial system is over, but another sharp repricing of risk is still possible, Bank of England Deputy Governor Jon Cunliffe said on Tuesday.

The biggest headwind for the pound remained Britain's exit from the European Union. The transition period when both parties are supposed to negotiate a future trade deal ends in December, but last week another round of negotiations concluded the same way an earlier one did - with not much success.

"Without such an agreement, trade would then be conducted according to WTO rules from next year onwards, which would be a bitter blow for both sides in real economic terms, but above all for the British economy, for which the EU is by far the largest trading partner," said Thu Lan Nguyen, forex analyst at Commerzbank.

"Until now, the market probably assumed that the British government under Prime Minister Boris Johnson was only bluffing," she said, but "the recent weakness of the pound shows that the market is no longer certain that British politicians will indeed prevent a no-deal Brexit at any price."

"For this reason we are forecasting a weaker pound in the short term and only a very moderate recovery later in the year," Nguyen said.

The pound was last changing hands at $1.2774, up 0.4% on the day against the greenback. But was flat versus the euro at 89.02 pence.

Sterling hasn't benefited as much as other major currencies from the recent risk rally in the past few weeks, though it has risen about 11% from the near 30-year low it sank to in mid-March.

Reporting by Olga Cotaga, Editing by William Maclean

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