Sterling erases gains on sub-zero rates fears

LONDON(Reuters) - Sterling erased earlier gains in a choppy session on Friday as investors hoped Britain’s new scaled-back job support scheme will be followed by other fiscal measures, but feared talks about a move to sub-zero rates could also intensify.

Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

Against the euro, sterling flattened at 91.59 pence by 1030 GMT., after hitting a one-week high of 91.13 on Thursday.

It was down 0.2% at $1.2718 against a stronger dollar, which is on course for its best week in six months. Sterling hit a two-month low of $1.2676 on Wednesday.

Finance Minister Rishi Sunak announced a new scheme to support jobs as COVID-19 cases surged again, but warned that the government will support only “viable” employment.

Analysts expect more steps to help the coronavirus-battered British economy to follow, with the sterling’s future depending much on whether sub-zero rates will be implemented.

“We’ve had some measures, which will stop the economy falling off a cliff but certainly it is quite possible that these will not be enough to subdue calls that the UK Government should do more in terms of fiscal support,” said Jane Foley, head of FX strategy at Rabobank.

But if “there is a reluctance” to announce more fiscal measures, the market will shift focus to the possibility of monetary policy measures, Foley said.

“Sterling could become more fearful of potentially negative interest rates,” she said.

Bank of England governor Andrew Bailey did not exclude the possibility of negative rates, saying on Thursday that the BoE is seeking answers on the suitability of sub-zero rates.

The outlook for sterling remains bleak as looming risk of a no-deal Brexit and new lockdown measures also weigh down the currency.

Earlier this week, Prime Minister Boris Johnson told Britons to work from home where possible and ordered restaurants and bars to close early. The new measures could last for six months, he said.

But the biggest threat to sterling remains the risk of the European Union and Britain failing to reach a trade agreement by the end of a transition period in December, analysts say.

Reporting by Joice Alves; Editing by Mark Heinrich and Tomasz Janowski