March 4, 2020 / 9:15 AM / a month ago

Sterling rallies against euro as rate cut talk swirls

LONDON (Reuters) - Sterling headed for its best day against the euro in two weeks and inched up from four-and-a-half-month lows against the dollar on Wednesday, as incoming Bank of England Governor Andrew Bailey said action could be needed to offset the effects of the coronavirus.

FILE PHOTO: British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Bailey said any BoE measures would be best done in tandem with Britain’s government, curbing expectations the bank might follow Tuesday’s emergency rate cut by the U.S. Federal Reserve.

The pound was flat at $1.2871 against the dollar, after dropping as low as $1.2771 earlier. Against the euro it was 0.6% higher at 86.70 pence per euro, reclaiming some of the more than 5% it has lost over the past two weeks.

“I think it is quite reasonable to expect we are going to have to provide - collectively going to have to provide - some form of supply-chain finance in the not-very-distant future.” Bailey told a UK Treasury Committee hearing.

Bailey said it would be particularly important to direct the support to small and medium-size firms, leaving analysts wondering about benchmark interest rates.

“There were rumours earlier on that the BoE could cut rates today, but that hasn’t happened. That has been an element (in the moves),” said Jane Foley, senior FX strategist at Rabobank.

Sterling had registered better-than-expected Purchasing Managers’ Index data on UK business activity in February. The survey was carried out largely before coronavirus concerns had taken hold.

Bailey, who takes the helm at the BoE on March 16, said the situation with the coronavirus had “moved on” in recent days and that he had discussed how best to coordinate with the finance ministry.

Money markets in Britain expecting the BoE to cut rates by 25 basis points at its next meeting, on March 26. The probability was 80% before Tuesday’s Fed cut, and almost 50 basis points of cuts are now priced in by the end of the year, compared with none a few weeks ago.

British 10-year government bond yields set record lows on Wednesday, typically a sign that investors are expecting a rate cut.

“Certainly the market is priced for a 25 bps cut at the March meeting, so the market is anticipating the BoE will use up its arsenal,” said Jeremy Stretch, head of G10 currency strategy at CIBC Capital Markets.

Reporting by Iain Withers; editing by Larry King

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