LONDON (Reuters) – Sterling rose on Tuesday against the dollar and the euro, reversing some of the previous day’s hefty losses, but Britain’s fractious trade talks with the EU and expectations of interest rate cuts kept the currency near recent 4-1/2-month lows.
British Prime Minister Boris Johnson has raised European Union hackles by saying Britain will not be bound by EU rules or the jurisdiction of its top court.
The first round of talks with the EU’s executive arm, the European Commission, is due to last until Thursday, with half a trillion euros’ worth of annual trade and close security ties at stake.
But those talks have been overshadowed by deepening concerns over the spread of corona virus and uncertainty over the extent of economic damage it could cause.
Market expectations have grown for central banks to cut interest rates to limit the fallout, including possibly through coordinated action. Policymakers from developed countries, including Britain are to hold a conference call at 1200 GMT to debate the next steps though Reuters reported no immediate stimulus will be offered.
Money markets have brought forward their bets on a Bank of England rate cut, now seeing a more than 80% chance of a 25 basis point cut on March 26. Almost two cuts are priced by the end of 2020, compared to none a few weeks ago <boewatch=></boewatch=>
“We think the BoE will probably be cutting rates 25bp at their March 26th meeting and that the budget (March 11th) will largely be directed to containing the effects of the coronavirus,” ING Bank analysts said, adding sterling could trade at 89 pence to the euro in coming months.
The currency stood at 86.9 pence by 8.20 GMT, up 0.24% on the day. It slid 1.3% the day before as the euro enjoyed a huge rally(EURGBP=D3) Against the dollar, it was up 0.3% at $1.2791 <gbp=d3>.</gbp=d3>
Markets will get an inkling of the state of the UK economy when IHS Markit releases February construction PMI but the figures are unlikely to capture the deepening coronavirus fears that picked up towards end-February in the UK.
Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv