Sterling's losses deepen as policy stimulus hopes fade

LONDON (Reuters) - Sterling’s losses deepened on Wednesday as investors cut positions on concerns that Britain’s new finance minister Rishi Sunak’s budget announcement in March may disappoint those waiting for a pick-up in fiscal spending.

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, Septem,ber 21, 2018. REUTERS/Phil Noble

Traders sold the pound around the $1.30 level after Tuesday’s gains as risky assets broadly came under pressure in response to a deadly virus spreading outside China, with the British currency leading losers.

“Traders are cutting back on some of the fiscal stimulus expectations in the upcoming budget and the $1.30 level is a good one to take some profits,” said Francesco Pesole, a currency strategist at ING.

The British currency fell as much as 0.7% to $1.2913 and held close to those levels in late trade.

Against the euro, sterling was down 0.6% at 84.17 pence per euro, having weakened to 84.33 pence - its lowest level in just over two weeks.

Sunak is due to announce the newly formed government’s budget on March 11, but some analysts are doubtful there would be enough increases in spending to stimulate the economy and push up the pound, as previously expected.

The Institute for Fiscal Studies think tank said on Wednesday that Sunak should resist the urge to rewrite Britain’s fiscal rules before the budget and that he should make plain that any spending increases will mean more tax.

“My sense is the market is pulling back on long pound positions originally destined to run into an upbeat expansionary fiscal stance in next month’s budget,” said Neil Jones, head of hedge fund sales at Mizuho.

An analyst at a major investment bank speaking on background said central banks were buying euro/sterling as the end of the month approaches, a normal pattern.

Investors held $2.38 billion in long sterling positions at the end of Feb. 18, which suggests there was room for the positions to be unwound this week.

Still, sterling was not far from its February highs and by comparison, when Prime Minister Boris Johnson’s Conservative Party won December’s election, strengthening his grip on parliament and removing some Brexit uncertainty, the pound was trading around 83 pence per euro.

“Market participants remain less concerned by Brexit risk as evident by the sharp decline in pound volatility since last year’s election,” said Derek Halpenny, head of research at MUFG.

Market gauges for implied volatility in sterling for all tenures, including one-month and one-year options contracts, are much lower than they were a couple of months ago.

Marshall Gittler, an analyst at BDSwiss, said he believed it was “only a matter of time before the market notices sterling’s resilience and decides to test it”.

Reporting by Olga Cotaga; Additional reporting by Saikat Chatterjee and Dhara Ranasinghe; Editing by Alison Williams