March 5, 2020 / 9:22 AM / a month ago

Pound hits one-week high vs. dollar amid waning expectations for emergency rate cut

LONDON (Reuters) - Sterling hit its highest level in a week to the dollar on Thursday as expectations waned for an immediate Bank of England rate cut to follow this week’s emergency move from the U.S. Federal Reserve to contain coronavirus damage.

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

Incoming BoE governor Andrew Bailey dampened expectations of an inter-meeting cut late on Wednesday, telling lawmakers the central bank should wait until it has more clarity about the economic hit from the outbreak.

That allowed the pound, which has been weighed down by rate-cut expectations in recent days, to recover some ground.

By 1740 GMT, sterling was higher by 0.6% to $1.2942, earlier hitting $1.2947 - its highest since Feb 26. It lost 0.1% against a broadly strengthening euro to last trade at 86.58 pence per euro.

“The stronger pound reflects in part some short-term relief that the BoE has not yet quickly followed the Fed and delivered an inter-meeting rate cut,” analysts at MUFG said.

“(Bailey’s remarks) signal that the BoE is not yet at the point to pull the trigger on further easing but we still expect sufficient evidence will be in place to take policy action at their next policy meeting on the 26th March.”

Money markets in Britain price in a 25 basis points rate cut at the BoE’s March meeting. Almost 50 basis points of cuts are now priced in by the end of the year, compared with none a few weeks ago prior to the spread of coronavirus.

The BoE’s top policymakers are trying to gauge the scale of the hit to Britain’s economy from the illness, governor Mark Carney said on Thursday.

Goldman Sachs expects the BoE to cut interest rates by 50 basis points at its March meeting, saying the coronavirus outbreak is likely to push the UK economy to the brink of recession in coming months.

Deutsche Bank analysts have cut their forecast for British economic growth this year to just 0.5%, citing the rapid coronavirus spread and saying the BoE could cut interest rates twice by May in response.

Sterling’s gains came after the pound enjoyed its best day in two weeks against the euro on Wednesday, after an expected swift rate cut by the BoE failed to materialise.

This helped it reclaim some of the more than 5% it had lost against the euro over the past two weeks.

However sterling remains close to four-and-a-half-month lows versus the single currency as concerns about Britain’s fractious talks with the European Union over future trading terms loom large.

Reporting by Iain Withers and Ritvik Carvalho; Editing by Philippa Fletcher and Frances Kerry

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