March 4, 2020 / 9:10 AM / a month ago

Sterling weakens, pressured by BoE rate cut talk

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, March 4 (Reuters) - Sterling dipped against the U.S. dollar and euro on Wednesday, as an unexpected rate cut from the U.S. Federal Reserve fuelled expectations the Bank of England could follow suit to protect the economy from the fallout of the coronavirus outbreak.

The Fed’s emergency move on Tuesday to shield the world’s largest economy from the impact of the virus failed to comfort markets overnight, and the dollar regained ground against a basket of currencies.

Consequently, sterling slipped back towards recent 4-1/2 month lows, down around 0.2% at $1.2792.

The pound also fell against the euro and was last down around a third of a percent at 87.40 pence per euro as investors bet the Bank of England (BoE) could follow the Fed.

Money markets have moved swiftly to fully price in a BoE rate cut of 25 basis points (bps) at its next meeting on March 26, up from a probability of 80% prior to the Fed move.

Almost two cuts are priced in by the end of 2020, compared with none a few weeks ago.

“Certainly the market is priced for a 25 bps cut at the March meeting, so the market is anticipating the BoE will use up its arsenal,” said Jeremy Stretch, head of G10 currency strategy at CIBC Capital Markets.

“We have the services PMI data this morning and markets are mindful that (next BoE chief) Andrew Bailey is speaking this afternoon, so there are number of factors playing into the sterling weakness,” he said.

Bailey, who will take the helm later this month, is scheduled to speak to lawmakers in parliament later in the day.

The February services Purchasing Mangers’ Index, an indicator of business activity, is due out later.

Britain set out its battle plan to tackle the spread of the virus on Tuesday, warning that as many as a fifth of employees could be off work at the peak of the outbreak.

BoE Governor Mark Carney told lawmakers on Tuesday he expected a “powerful and timely” global response and said the central bank stood ready to act to support the economy.

“Whether or not the BoE follows the markets direction, particularly before the next meeting, remains unclear but the odds are clearly rising,” analysts at RBC said in a note. (Reporting by Iain Withers; Editing by Mark Potter)

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