May 18, 2020 / 8:25 AM / 19 days ago

Sterling edges off eight-week lows despite talk of negative rates, Brexit gloom

LONDON (Reuters) - Sterling climbed off eight-week lows against the dollar and the euro on Monday, as broad dollar weakness helped the currency shrug off talk of negative interest rates from the Bank of England and a stalemate in Brexit negotiations.

FILE PHOTO: Pound banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

The pound has already fallen sharply this month, by 3.75% against the dollar, making it the worst performing G10 currency.

Britain and the EU’s chief negotiators on Friday gave downbeat assessments of the latest round of Brexit negotiations, while the Bank of England’s chief economist refused to rule out the possibility of taking interest rates below zero to prop up the country’s economy.

The stalemate between Britain and the EU has raised the prospect that there will be no deal struck on Britain’s formal departure from the bloc after the end of the current transition period, a scenario that would damage global trade as the world copes with the economic fallout from the coronavirus pandemic.

That, added to a resurfacing of talk of cutting interest rates below zero as Britain faces potentially its sharpest economic downturn in 300 years, weighed on the pound.

Money markets have already ramped up expectations of negative interest rates, with futures contracts from December 2020 dipping into negative territory IRPR on Monday as traders raised bets that British benchmark interest rates - currently at record lows of 0.1% - would fall below zero.

By 1518 GMT, sterling traded 0.9% higher against the dollar at $1.22, just off its March 26 low of $1.2075, which it hit during Asian trading hours. GBP=D3

Versus the euro, it was 0.4% higher at 89.08 pence, off its lowest levels since March 31. EURGBP=D3

For a graphic on Sterling hovers near 8-week lows:

here

“We’ve seen sentiment around sterling flip from positive to negative in recent weeks as investors shift focus to local idiosyncratic risks,” said Viraj Patel, FX and global macro strategist at Arkera.

“Talk of negative rates in the UK (with markets slowly pricing in this reality) - as well as the renewed threat of a ‘No Deal’ Brexit once the transition period ends this year - are materially weighing on the pound.”

Patel said both issues are likely to gain greater airtime in the coming weeks and months - not least as Britain must decide by the end of June on whether to extend the Brexit transition period, which is due to end at the end of 2020.

Senior British government minister Michael Gove said on Sunday there was a post-Brexit trade deal to be done with the EU, provided that the bloc agreed to compromise.

Britain’s economy is unlikely to bounce back quickly as it recovers from its coronavirus shutdown, which could have wiped more than 30% off output last month, the head of the Office for Budget Responsibility (OBR) said on Sunday.

“The risk of additional pound sell-offs in the near future appear quite material,” ING strategists said in a note to clients.

“We remain sceptical about the BoE venturing into negative rates, but investors’ high sensitivity to the subject likely warrants additional near-term downside risk for sterling. $1.20 appears as an increasingly fragile support for cable.”

Reporting by Ritvik Carvalho; Editing by Gareth Jones

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