By Elizabeth Howcroft
LONDON (Reuters) - The pound rose to a three-week high against a broadly weaker dollar on Monday as Britain relaxed lockdown restrictions, but the market's net short position on sterling is the largest in more than five months, suggesting traders remain negative.
The pound is being weighed down by a number of factors: Britain's high COVID-19 death rate, a lack of progress in Brexit negotiations, a bleak economic outlook, and the Bank of England (BoE) considering negative interest rates.
New rules designed to ease the lockdown in England came into force on Monday, even though scientists warned that, in the absence of a functioning system to track new outbreaks, the move was risky.
The new rules do not apply to Wales, Scotland and Northern Ireland.
A fourth round of trade talks on relations with the European Union following Britain's departure from the bloc will start this week. Britain has until July 1 to ask for an extension to the current transition period which is due to end in December.
"We expect the pound to continue to trade at weaker levels in the near-term unless there is a surprise breakthrough in Brexit talks and/or the BoE clearly rules out negative rates after completing their ongoing review of policy options," Lee Hardman, currency analyst at MUFG, wrote in a note to clients.
Against a broadly weaker dollar, the pound hit a three-week high of $1.2425 around 0800 GMT, before easing slightly. It was last at $1.2390.
Versus the euro, the pound strengthened around 0.2%, last at 89.73 pence (EURGBP=D3).
"We prefer to back the EUR over GBP this week and feel 0.91 should be the target for EUR/GBP this June," ING strategists wrote in a note to clients.
The market's net short position on the pound increased for the twelfth week running in the week ending May 26, according to weekly positioning data.
The last time investors were this bearish on the pound was in the run-up to the December 2019 election.
British manufacturers saw another sharp downturn in May but the pace of the slump eased from April's record fall as the coronavirus shutdown brought much of the economy to a halt, PMI data showed.