* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates prices)
By Tommy Wilkes
LONDON, Feb 25 (Reuters) - Sterling rebounded above $1.30 on Tuesday as markets worrying about the spread of coronavirus found some stability, encouraging investors to pare back their rush into dollars that had sent the British currency lower.
Traders of the pound will also be watching for developments in Brussels and London ahead of the European Union and Britain beginning their negotiations to agree a trade deal for the end of a Brexit transition period in December 2020.
On Tuesday, however, the main driver of the pound was a tentative recovery in risk appetite following Monday’s significant selloff.
European and U.S. stocks had suffered their biggest loses since mid-2016 amid fears the coronavirus was developing into a pandemic that could cripple global supply chains and wreak far greater economic damage than first thought.
That sent investors clambering for the safety of the dollar, the world’s most liquid currency. Most other currencies were hit, and sterling fell to as low as $1.2887.
But the pound rallied back above $1.30, rising as high as $1.3018 for the first time since Feb. 19. Against the euro, sterling also rose, up 0.4% at 83.38 pence.
The pound has been supported this month from signs of a rebound in the British economy and on expectations a new finance minister will raise public spending at next month’s budget.
But the main catalyst was the dollar’s retreat from multi-year highs as expectations grew of a rate cut by the U.S. Federal Reserve - CME Group’s FedWatch tool shows a 46% chance the Fed will cut rates in June to between 1% and 1.25% from 1.5% to 1.75%.
The pound also is benefiting from euro weakness caused by growing risks to economic growth from the coronavirus spread in Italy.
Latest figures show funds have ramped up long positions in the pound to near two-year highs. But while those positions look large in relation to recent market moves, they remain a long way from 2018 highs, suggesting there is room for more gains.
With little in the way of new economic data, investors are also focused on EU and UK relations ahead of both sides starting trade negotiations.
RBC Capital Markets Global Head of FX Strategy Elsa Lignos said media reports pointing out EU and British differences over their negotiation mandates showed that “the two sides are far apart as a starting point and it remains to be seen how much progress they can make in the remaining nine months”.
Reporting by Tommy Reggiori Wilkes and Saikat Chatterjee; additional reporting by Sujata Rao, editing by Ed Osmond, William Maclean