May 7, 2020 / 6:35 AM / 20 days ago

Short-lived sterling rally curtailed by coronavirus and Brexit

LONDON (Reuters) - Sterling hit a 16-day low against the dollar on Thursday, despite some brief respite after the Bank of England’s policy statement, dominated by uncertainty over how Britain will ease its coronavirus lockdown and Brexit.

FILE PHOTO: Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/

As broadly expected, the BoE held rates steady and announced no further stimulus, saying it was ready to take further action to counter the coronavirus pandemic’s fallout.

The government is due to announce possible changes to social restrictions on Sunday. A spokesman said that Prime Minister Boris Johnson would announce a very limited easing of lockdown measures.

Analysts said the pound’s brief rally that followed the BoE’s announcement was due more to a squeeze from recent sterling weakness than any surprises from the central bank.

“The pound staged a knee-jerk relief rally, as there had been some expectations that the BoE could extend quantitative easing,” Lee Hardman, currency strategist at MUFG.

In what it called an illustrative scenario, the BoE forecast Britain’s biggest economic slump in over 300 years in 2020, with a 14% contraction in growth, then a 15% bounceback in 2021.

The pound strengthened to as much as $1.2418 after the announcement, but steadily declined from around 1100 GMT, reaching a low of $1.2266.

“But the BoE is likely to extend asset purchases, so that’s why there’s been only a short-term boost for the pound today,” MUFG’s Hardman said.

Sterling was last at $1.2274, falling below $1.23 for the first time in two weeks, down 0.6% since New York’s close.

Against the euro, which also saw a brief post-BoE rally, it was last at 87.78 pence, down around 0.4%.

(Graphic: BoE announcement lifts sterling - here)

The central bank’s Monetary Policy Committee kept the Bank Rate at its all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at 645 billion pounds ($797 billion).

But two of the nine policymakers voted for 100 billion pounds’ worth of more bond-buying firepower.

Further bond-buying is expected in the coming months, and a suggestion that the bank’s 200 billion of asset purchases announced in March could run out by the end of July may also have played a part in lifting the pound, Rabobank’s Senior FX Strategist Jane Foley said, as it underpinned the expectation that further stimulus will be announced.

The BoE will consider what it needs to do with its bond-buying programme in June when it will have more clarity on how the government intends to lift its coronavirus lockdown, Governor Andrew Bailey said.

Britain has been slower than other European countries to announce plans to ease lockdown measures, which is seen as a downside risk for the pound.

Brexit-related risks are also back on the table for traders, with Britain insisting that it will not seek an extension to the transition period, which is due to end in December 2020, whether or not a trade deal has been struck.

The EU’s trade chief said that there is no real sign that Britain is approaching trade talks with the European Union with a plan to succeed and it appears set to blame any post-Brexit fallout on the economic shock from COVID-19.

“The sterling market awaits more commentary and details around forward guidance but in the grand scheme of things it’s comfortable with the BoE position and will look for more clarity on lockdown easing and Brexit transition to guide GBP,” Ian Tew, sterling trader at Barclays, said.

Reporting by Elizabeth Howcroft; Additional reporting by Dhara Ranasinghe; Editing by Toby Chopra, Raissa Kasolowsky and Alexander Smith

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