January 28, 2020 / 9:09 AM / 23 days ago

Sterling drops on Brexit trade deal concerns, BoE nerves

LONDON (Reuters) - Britain’s pound slipped to a one-week low versus the dollar and weakened against the euro on Tuesday on concern about Britain’s future relationship with the European Union and ahead of a Bank of England meeting that could see an interest rate cut.

FILE PHOTO: A pound coin is placed on broken glass and British flag in this illustration picture taken January 28, 2019. REUTERS/Dado Ruvic

Ahead of the knife-edge BoE rate decision on Thursday, sterling has been pushed and pulled this month by speculation over whether an imminent rate reduction is likely. Money markets price in a 52% chance of a 25 basis point cut to the base rate, currently at 0.75%.

But with Britain formally set to leave the European Union on Friday, concerns about future UK-EU relations are also coming back into focus, analysts said.

The EU will “never, never, never” compromise on the integrity of its single market, its chief Brexit negotiator warned Britain on Monday, saying London must now face reality after underestimating the costs of leaving.

“It’s been a case that Brexit issues have been off the agenda for a while, but there are now some signs of friction between the two sides as negotiations are gearing up, and that might be a source of consternation,” said Jeremy Stretch, head of G10 currency strategy at CIBC Capital Markets in London.

He also noted an article by the Times newspaper reporting that Brussels believes EU judges should have the power to rule on any post-Brexit agreement with the UK as a potential explanation for early sterling weakness.

Sterling fell as much as 0.5% to $1.2986, its lowest since Jan. 20. The British currency was 0.4% weaker against the euro at 84.70 pence, its lowest Jan. 22.

Market positioning data released on Friday by the U.S. Commodity Futures Trading Commission suggests that, though speculators have slightly reduced net longs in sterling, they hold a substantially large long position.

Those long positions are likely to remain under pressure this week before the central bank decision in a broader market that is wary of adding to risky positions.

Other major currencies were broadly stable with the dollar hovering at an eight-week high as investors focused on the economic fallout from the new coronavirus that has killed 106 people in China.

Reporting by Dhara Ranasinghe; Editing by Catherine Evans and Mark Heinrich

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