March 16, 2020 / 9:36 AM / 3 months ago

Sterling at five-month low after U.S. rate cut

LONDON (Reuters) - Sterling stumbled against the U.S. dollar and euro on Monday in volatile trading as money markets digested a further surprise cut to U.S. rates to rock-bottom levels by the Federal Reserve in the face of the coronavirus pandemic.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

The Fed cut to a target rate of 0% to 0.25% on Sunday, while five other central banks including the Bank of England took steps to relieve a shortage of dollars and provide extra liquidity as part of a coordinated global action.

The dollar fell against a basket of currencies in early trading on Monday, but later regained ground as investors resumed their rush to hold the world’s most liquid currency.

Rate cuts typically weigh on a country’s currency by making investments in that currency less attractive, but the selling pressure on the dollar was short-lived as it is still seen as a safe bet in times of crisis.

On another turbulent day for markets, the pound touched a new five-month low against the greenback and a six-month low against the euro as coronavirus fears continued to dominate.

The pound held at its lowest level since early October at $1.2215 and was last down 0.5% against the single currency at 90.94 pence per euro.

It performed less favourably versus the dollar than other currencies seen as safer havens such as the Japanese yen and Swiss franc, and to some extent the euro.

“The euro is currently profiting (after the Fed cut) as it is seen as a safe haven over the pound,” said Kenneth Broux, FX strategist at Societe Generale.

“Both the UK and euro zone economies are likely to see a negative quarter or two of growth at least. But the euro zone has a current account surplus, it doesn’t rely on foreign investment to the same extent.”

He added that the Bank of England may have to announce more stimulus measures after its next meeting on March 26, including potentially cutting rates further or restarting quantitative easing asset purchases.

Money markets are already pricing in nearly a 30% probability of a quarter-point rate cut at the BoE’s next policy meeting.

Reporting by Iain Withers; Editing by Saikat Chatterjee and Catherine Evans

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