March 5, 2020 / 9:17 AM / a month ago

Sterling gains as emergency rate cut expectations wane

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Mar 5 (Reuters) - Sterling gained further ground against the U.S. dollar and euro on Thursday, as expectations waned for an immediate Bank of England rate cut to follow this week’s emergency move from the U.S. Federal Reserve to contain coronavirus damage.

Incoming BoE governor Andrew Bailey dampened expectations of an inter-meeting cut late on Wednesday, telling lawmakers the central bank should wait until it has more clarity about the economic hit from the outbreak.

That has allowed the pound, which has been weighed down by rate-cut expectations in recent days, to recover some ground.

Sterling edged up 0.2% to $1.2900, moving further away from 4-1/2 month lows hit on Friday. It gained a third of a percent against the euro at 86.22 pence per euro.

“The stronger pound reflects in part some short-term relief that the BoE has not yet quickly followed the Fed and delivered an inter-meeting rate cut,” analysts at MUFG said.

“(Bailey’s remarks) signal that the BoE is not yet at the point to pull the trigger on further easing but we still expect sufficient evidence will be in place to take policy action at their next policy meeting on the 26th March.”

Money markets in Britain price in a 25 basis points rate cut at the BoE’s March meeting. Almost 50 basis points of cuts are now priced in by the end of the year, compared with none a few weeks ago prior to the spread of coronavirus.

Investors will be keeping an eye out for further hints on BoE thinking on rates when the central bank’s chief economist Andy Haldane speaks at an event in Paris at 1300 GMT, while current governor Mark Carney gives a speech in London at 1700 GMT.

Sterling’s gains came after the pound enjoyed its best day in two weeks against the euro on Wednesday, up 0.6%, after an expected swift rate cut by the BoE failed to materialise.

This helped it reclaim some of the more than 5% it had lost against the euro over the past two weeks.

However sterling remains close to four-and-a-half-month lows versus the single currency as concerns about Britain’s fractious talks with the European Union over future trading terms loom large.

Reporting by Iain Withers; editing by Philippa Fletcher

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