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Sterling falls further on mounting rate cut bets

The British pound dropped to a seven-week low against the euro and a new 2020 low versus the dollar on Tuesday, as investors worried about the state of the economy and speculated that it would lead the Bank of England to cut interest rates this month.

Sterling fell sharply on Monday after another BoE policymaker had said he would vote for a cut to rates later this month unless economic data improved significantly.
Growth and industrial production data published on Monday were worse than expected, causing a spike in expectations for a rate cut. Money markets are now pricing in a close to 50% chance for a 25 basis point cut to rates from the current level of 0.75%, up from around a 20% chance on Friday.
Viraj Patel, a global macro strategist at Arkera, said he did not believe the Bank of England would cut rates at its January meeting, although markets are now shifting towards this idea.

“Expectations becoming embedded into markets may force the BoE’s hand. Either way the bulk of the dovish BoE re-pricing has happened in $GBP markets,” he said.
Sterling weakened to as low as $1.2955, down 0.3% on the day and bringing its year-to-date losses to almost 2.5%.
The pound dropped to 85.95 pence per euro, its weakest since Nov. 22.
“With GBP/USD speculative positioning turning sharply over recent months, the downside risk to GBP is building,” ING analysts noted, referring to investors’ shift to a net long pound position from a sizeable net short last month.

“Bar a possible rate cut, the uncertainty about the EU-UK trade deal should also limit GBP upside throughout 1H20.”
Concerns about Britain’s ability to agree to a trade deal with the European Union before the end of a Brexit transition period that Prime Minister Boris Johnson has said must conclude at the end of 2020 also weigh on the currency.
Short sterling futures continued to rally, as investors scaled up their bets on a cut in interest rates.

Source: Reuters

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