June 18, 2020 / 8:47 AM / a month ago

Sterling dips as eyes turn to Bank of England meeting

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Ritvik Carvalho

LONDON, June 18(Reuters) - Sterling dipped against the dollar and euro on Thursday as some investors braced for a larger-than-expected increase in the Bank of England’s quantitative easing programme to combat the economic fallout of the COVID-19 pandemic.

The BoE, which meets on Thursday, is expected to build up its war-chest for fighting the crisis by announcing an increase of at least 100 billion pounds ($125 billion) in its bond-buying programme.

The British central bank has already spent most of the 200 billion pounds of the firepower it gave itself in March as it soaks up much of the government’s COVID-19 borrowing.

With its key interest rate at just 0.1%, Governor Andrew Bailey has said the BoE will contemplate going below zero for the first time, but the review will take time.

That leaves bond-buying as the central bank’s most powerful option to help the world’s fifth-biggest economy recover from its record 25% slump in March and April.

By 0823 GMT, the pound was 0.2% lower against the dollar at $1.2530, and 0.15% lower to the euro at 89.66 pence.

“The pound remains defensive ahead of the Bank of England meeting - partly as markets may be bracing themselves for a bigger QE expansion than the 100 billion consensus,” said Viraj Patel, FX and global macro strategist at Arkera.

“There’s a good argument for this - given that a 100 billion expansion would barely last through summer at the current pace of weekly gilt purchases. We would consider a 100 billion QE expansion to be a slightly more hawkish signal than the range of possible outcomes today.”

While most economists polled by Reuters expect a 100-billion-pound expansion, some analysts expect more. ING Bank and Nomura for instance, expect an increase of 150 billion.

Marshall Gittler, head of investment research at BDSwiss Group estimates that at a current pace of purchases of 13.5 billion pounds a week, the BoE’s asset purchase facility will be full by 17 July.

Investors will also watch for hints of negative rates from the BoE.

“Uncertainty around a UK-EU trade deal should prevent markets from pricing out the possibility of negative rates in the UK,” ING strategists said in a daily note.

“We expect little progress in UK-EU trade negotiations in the weeks to come, suggesting further downside to the pound and the currency to be one of the underperformers in the G10 FX space.”

Reporting by Ritvik Carvalho; Editing by Barbara Lewis

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