February 26, 2020 / 9:48 AM / a month ago

Sterling weakens on rate-cut expectations, still near February's highs

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

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

By Olga Cotaga

LONDON, Feb 26 (Reuters) - The pound fell on Wednesday as expectations grew the Bank of England would cut interest rates, but it remained near its high for February on optimism that loose fiscal policy would boost Britain’s economy.

The spread of the coronavirus has led some investors to believe central banks will be forced to loosen monetary policy to shield their economies. In the UK, money markets are pricing in a 25-basis-point cut in the current 0.75% rate by August.

However, finance minister Rishi Sunak is due to announce the newly formed government’s budget on March 11, and some analysts expect increases in spending that will stimulate the economy and push up the pound.

“The pound is benefiting in the near term from evidence of a Boris bounce for the UK economy,” said Derek Halpenny, head of research at MUFG. “At the same time, market participants remain less concerned by Brexit risk as evident by the sharp decline in pound volatility since last year’s election.”

Market gauges for implied volatility in sterling for all tenures, including one-month and one-year options contracts, are much lower than they were a couple of months ago.

In the spot market, sterling was trading down 0.3% at $1.2965 and down 0.4% against the euro at 84.03 pence .

By comparison, when Prime Minister Boris Johnson’s Tories won December’s election, strengthening his grip on parliament and removing some Brexit uncertainty, the pound was trading around 83 pence per euro.

Marshall Gittler, an analyst at BDSwiss, said he believed it was “only a matter of time before the market notices sterling’s resilience and decides to test it.”

The pound was also capped by some people’s expectations that Sunak’s budget may not bring as much stimulus as predicted.

The Institute for Fiscal Studies think tank said on Wednesday that Sunak should resist the urge to rewrite Britain’s fiscal rules before the budget and that he should make plain that any spending increases will mean more tax.

Reporting by Olga Cotaga, editing by Larry King

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