May 27, 2020 / 8:28 AM / 2 months ago

Sterling retreats as concern over negative rates lingers

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

By Olga Cotaga

LONDON, May 27 (Reuters) - Sterling retreated below $1.23 on Wednesday as the dollar regained strength and investors’ focus shifted back to the possibility of negative interest rates in Britain.

Bank of England Chief Economist Andy Haldane on Tuesday played down the prospect of imminently taking rates into negative territory, saying that “reviewing and doing are different things”.

But analysts believe that once the talk of negative rates has taken hold in the markets, it would be hard to shift the focus away from it.

“The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates,” said Derek Halpenny, head of research at MUFG.

“We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation,” he said.

Halpenny said he has gone short sterling/Japanese yen on a short-term basis “to capture the ongoing underperformance of the pound due to negative rate speculation”.

The pound was last down 0.3% at $1.2298 and shed 0.2% versus the euro to 89.22 pence.

Apart from negative rates, a high rate of COVID-19 related deaths and an astonishing amount of government debt were also weighing on sterling.

Britain is likely to run a budget deficit equal to 5% of gross domestic product in 2024, when Britain’s next national election is due, the Financial Times reported. (Reporting by Olga Cotaga Editing by Gareth Jones)

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