March 10, 2020 / 4:43 PM / a month ago

Sterling drops as U.S. virus spending package talk boosts dollar

LONDON (Reuters) - Sterling fell on Tuesday, unwinding most of its gains notched up in the previous session, thanks to a broad dollar rebound on expectations that the White House will unveil a fiscal stimulus package to limit the economic damage wrought by the coronavirus.

FILE PHOTO: Bank employee counts pound notes at Kasikornbank in Bangkok, Thailand October 12, 2010. REUTERS/Sukree Sukplang/File Photo

The greenback clawed back ground against a basket of currencies, including the pound, after a recent slump fuelled by coronavirus fears and a collapse in U.S. government bond yields amid a flight to safety by investors.

President Donald Trump planned a news conference later on Tuesday after saying on Monday that he was prepared to take “major” steps to bolster the U.S. economy, boosting the dollar.

British investors will have to wait until Wednesday to see the extent of their own government’s fiscal response to the virus outbreak, when new finance minister Rishi Sunak is expected to raise spending in his first budget.

Sterling extended losses and was down 1.5% against the greenback at $1.2930 on Tuesday, after hitting a more than month-high of $1.32 the previous day.

Analysts said the pound could face further selling pressure as markets expect the central bank to cut interest rates.

“The downside pressure should be large today, targeting a correction,” said Karl Steiner, chief quantitative strategist at SEB, adding that it could soon trade at $1.2982.

The pound edged up against the euro, up 0.29% at 87.05 pence per euro, but remained close to four-and-a-half month lows as concerns about ongoing fractious Brexit trade talks continue to weigh on the currency.

Investors will be watching whether the Bank of England chooses to cut benchmark rates alongside the government’s budget tomorrow, after incoming Bank of England governor Andrew Bailey suggested there should be coordinated action.

However, analysts at ING suggested that the BoE may feel it has to wait until its next meeting on March 26.

“A rate cut linked to a budget may inevitably raise some questions surrounding independence – even if the circumstances may warrant it,” they said.

Money markets are pricing in nearly two BoE rate cuts this month.

Reporting by Iain Withers; Editing by Mark Heinrich

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