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The Pound-to-Dollar exchange rate has partially reversed earlier losses in tandem with a widespread softening of the Dollar so far in the second leg of the week, though some analysts say it's not yet out of the proverbial woods and that Sterling remains vulnerable to further losses.

Pound Sterling was higher almost across the board when measured against the G10 contingent of the major currency club on Thursday, having ceded ground to only the recently-troubled Australian Dollar and somewhat trampled Norwegian Krone.

Price action came amid a widespread reversal to the downside for Dollar exchange rates, the second consecutive softening of the greenback following an almost unbroken week of gains by the U.S. currency which is also into its seventh week of appreciation.

“The pound is attempting to stabilise after what has been a poor week so far. GBP dropped at the start of the week against both the USD and the EUR on reports of surging cases of the Delta variant in the UK. The move lower may have then been accelerated by a deterioration in the technical picture,” says Jane Foley, a senior FX strategist at Rabobank.

“Last Friday cable broke down from an 8 day rising channel formation. At the start of the week it broke below the 200 day [moving-average]. Both of these were bearish signals. Sentiment has also been undermined by dovish commentaries at the start of the week from two MPC policy setters which kicked the legs out from under the hawkish remarks last week from Saunders and Ramsden,” Foley adds.

Thursday’s relief and the prominence of Sterling, the Aussie and Krone in the rankings reflects a partial and still tentative reversal of the week’s earlier trends.

“The recent low has not been confirmed by the daily [relative strength index] and we would look to sell the rallies,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

“We look for a slide to 1.3504/1.3457, the 55-week moving-average and the 50% retracement of the move higher from September 2020,” Jones writes in a Thursday note.

Jones and the Commerzbank team say the Pound-Dollar rate will be vulnerable to further losses the entire time it remains beneath 1.3840, and are sellers of Sterling from 1.3740.

The Pound sustained some of the heaviest losses among major currencies for the first time in a while during the Dollar’s latest advance, which placed a question mark over the broader technical trend in GBP/USD.

Many observers connected Sterling’s losses to a proliferation of the ‘Delta variant’ in the UK and remarks made on Monday by members of the Monetary Policy Committee at the Bank of England (BoE), who poured cold water over suggestions that the bank should 'tighten' its monetary policy any time soon.

“According to Broadbent, wage growth will ultimately determine whether inflation pressures turn out to be more persistent. At the moment, UK headline wage numbers are inconclusive and beset by a host of distortionary effects,” says Elias Haddad, a strategist at Commonwealth Bank of Australia.

The Pound displayed no obvious reaction to Thursday’s comparatively neutral address from Bank of England Deputy Governor Ben Broadbent, who said little to deter the market from the view that there may be only limited appetite at the bank for any changes to its monetary policy settings within the foreseeable future.

Broadbent suggested that although the BoE expects inflation to rise “significantly further, to well over 3%, over the next six months” it would take time for the BoE to be able to assess how much of the recent increase in inflation is likely to be more persistent, with much of that judgement hinged on developments in the job market.

For the Pound-to-Dollar rate this wait-and-see policy stance from the BoE leaves a lot to be determined by the Federal Reserve (Fed) next Wednesday, which is in turn key to market appetite for the U.S. Dollar.

“USD is off recent highs but still within this month’s upward sloping channel,” CBA's Haddad notes.

The Dollar’s seven-week advance has roots in investor expectations that the strong U.S. economic recovery and recent increases in U.S. inflation would see the Fed compelled to curtail its quantitative easing programme over the coming months, and lift its interest rate as soon as the end of next year.

Those views were encouraged when in June the Fed’s dot-plot of individual rate setters’ projections for the Fed Funds rate range showed a large minority of the bank’s policymakers expecting borrowing costs to rise at the end of 2022, with a majority also anticipating an increase in interest rates before the end of 2023, both dates being sooner than was previously guided for by the Fed.

“The US$ has been trading on the front foot regardless of the risk sentiment swings in recent days, forging ahead when optimistic rebound assumptions are challenged by the spread of the delta variant and holding firm when markets are steadier and more focussed on the Fed and inflation risks,” says Richard Franulovich, head of FX strategy at Westpac.

“The ECB’s policy review announcement and a shift to a more structurally dovish policy stance later this week should cement the Dollar Index at higher levels. A test of the March 2021 93.45 highs in Q3 is on the cards,” Franulovich adds.