January 9, 2020 / 10:08 AM / 2 months ago

Pound falls after Carney signals possible rate cut

LONDON (Reuters) - Sterling fell to a near two-week low against the U.S. dollar after Bank of England Governor Mark Carney said there could be a “relatively prompt response” from the bank if the current spell of economic weakness persisted.

FILE PHOTO: A pound coin is placed on broken glass and British flag in this illustration picture taken January 28, 2019. REUTERS/Dado Ruvic/File Photo

Sterling fell as much as 0.6% to $1.3014, its lowest level since Dec. 27.. It also fell against the euro, down 0.6% at 85.34 pence.

British government bond yields fell, with two-year gilt yields last down almost 5 basis points on the day at 0.59%. Bond yields move inversely with prices.

Money markets currently price a roughly 60% chance of a 25 basis point interest rate cut by December. That is versus just over 50% at the end of 2019.

While Carney also described reasons for optimism, investors honed in on the comments about a possible rate cut, which the governor linked directly to the current economic outlook.

“Overall, Carney signalled that the combination of conventional and unconventional tools would equate to around 250 bps in cuts,” Scotiabank analysts said. “Cable (sterling versus the dollar) will likely remain near the low $1.30s ahead of tomorrow’s U.S. nonfarm payrolls figures.”

The latest poor economic data out of Britain showed shoppers cut back on spending in late 2019, rounding off the weakest year since at least the mid-1990s for retail sales as measured by an industry group.

The pound has already been struggling, despite a rebound in riskier currencies on easing fears of a military escalation between the the United States and Iran following the killing of a key Iranian general last week.

BREXIT BOUND

Investors are also looking ahead at the challenges Britain and the European Union face in agreeing on a new trading relationship, after the UK parliament votes on Thursday on Prime Minister Boris Johnson’s withdrawal deal.

Approval of the bill, which markets have priced in as a given since Johnson’s landslide December general election win, will help the country leave the EU in an orderly fashion on Jan. 31.

But attention is shifting to what Britain’s future relationship with Europe will look like when it begins an 11-month transition period.

Johnson has said he will not ask for an extension of the transition period beyond 2020, while the EU has said that it would be “basically impossible” to negotiate all aspects of the relationship by then.

The EU’s chief Brexit negotiator, Michel Barnier, said on Thursday that the level of access for British products to EU markets will be proportionate to the UK’s level of ambition to keep EU standards.

“From a market perspective, the passage of the withdrawal bill is very much locked in and it’s unlikely to have a material impact in itself,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

Reporting by Yoruk Bahceli, additional reporting by Dhara Ranasinghe, Sujata Rao and Tommy Wilkes; editing by Hugh Lawson and Nick Macfie

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