March 19, 2020 / 10:43 AM / 11 days ago

Sterling bounces after BoE cut, still close to 1985 lows

LONDON (Reuters) - Sterling rebounded against the dollar and euro on Thursday after the Bank of England cut interest rates to 0.1%, helping support the pound after it had sunk to its lowest level since 1985 versus the greenback as investors rushed to hold U.S. dollars.

FILE PHOTO: An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

The British central bank also ramped up its bond-buying programme in a new attempt to shield Britain’s economy from the coronavirus pandemic.

The British currency had fallen around 12% against the dollar over eight brutal days of trading prior, hitting a low of $1.1450 in New York trading hours on Wednesday.

The BoE package on Thursday helped the pound claw back some of the previous day’s lost ground, although it quickly lost momentum and was last up just a quarter of a percent on the day at nearly $1.17.

Despite the pound’s rebound, it remains at levels not seen since 1985, when the Plaza Accord was signed by the world’s richest nations to weaken the dollar and drag the U.S. economy out of recession.

Against the euro the pound fared better, rebounding from an 11-year low of 95 pence per euro earlier and was last up 2.1% at 91.70 pence.

“In our view it is the additional quantitative easing in today’s Bank of England package that will have the most significant impact,” said Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management.

“The support to the economy and health system will require vastly higher government borrowing. The central bank showing willing to buy government debt will ensure the market can absorb this additional issuance without undue stress.”

Other analysts said the pound was also benefiting from improved risk sentiment across markets on Thursday.

“Liquidity is a lot better in sterling than it was yesterday. There has been buying and selling in both directions. As opposed to yesterday when all you had was a near vertical downward line,” said Neil Jones, head of hedge fund FX sales at Mizuho Bank.

Sterling has been one of several currencies to tank as investors rush to put their money in dollars, the world’s most liquid currency and seen as a safe haven in times of crisis.

Analysts say Britain’s large current account deficit - which means it depends on outside investment to pay its way in the world - and the country’s delayed measures to combat the spread of the virus mean sterling remains vulnerable.

Expected volatility gauges for sterling against the dollar jumped to their highest level since before the 2016 Brexit vote earlier on Thursday, showing money markets are bracing for further big moves.

“There is still huge FX risk on all sides...The pound has been seen as a particularly risky currency and everyone is dropping risk where possible,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

Reporting by Iain Withers; Editing by Tommy Reggiori Wilkes and Angus MacSwan

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