March 3, 2020 / 11:30 AM / 3 months ago

UPDATE 2-Sterling rallies versus dollar after Fed rate cut, slips against euro

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote (Updates after Fed move)

By Iain Withers and Sujata Rao

LONDON, March 3 (Reuters) - Sterling extended gains against the broadly weak dollar on Tuesday after a sudden rate cut by the U.S. Federal Reserve in response to coronavirus damage, while investors bet Britain’s central bank would follow suit.

The U.S. Fed stunned markets by cutting interest rates by half a percentage point in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus spread.

Sterling has been laid low in recent weeks by fractious trade talks with the EU and growing expectations of rate cuts.

The currency, which has come under heavy selling pressure in recent days, recovered ground and was boosted further following the Fed’s action.

The pound was up around 0.5% at $1.2811, above a recent 4-1/2 month low of around $1.2726.

However sterling fell against the euro and was last down almost a fifth of a percent at 87.30 pence per euro as investors bet the Bank of England could follow the Fed.

Money markets are now fully pricing in a BoE rate cut of 25 basis points on March 26 when it next meets, after a probability of 80% earlier in the day. Almost two cuts are priced by the end of 2020, compared to none a few weeks ago.

“There’s increasing pressure on the Bank of England to shift policy in March. We don’t know how the new governor will react to all that,” Morten Lund, senior FX strategist at Nordea said, referring to the incoming BoE chief Andrew Bailey.

“I wouldn’t want to be long sterling at the moment. The risk is on the downside both in terms of the EU trade talks and coronavirus.”

Analysts at ING said they expected the BoE to cut rates by 25 bps in March, adding that sterling could trade at 89 pence to the euro in coming months.

Earlier on Tuesday, BoE Governor Mark Carney told lawmakers he expected a “powerful and timely” global response to the economic hit from coronavirus.

For now, the response to coronavirus overshadowed upcoming trade negotistions between Britain and the EU which have weighed on sterling.

British Prime Minister Boris Johnson has raised European Union hackles by saying Britain will not be bound by EU rules or the jurisdiction of the EU top court following its departure from the bloc on Jan. 31.

The first round of talks with the EU’s executive arm, the European Commission, is due to last until Thursday, with half a trillion euros’ worth of annual trade at stake.

Earlier on Tuesday, sterling had barely moved on better than expected construction activity data for February, which was unlikely to have captured recent deepening coronavirus fears in the UK. (Reporting by Sujata Rao and Iain Withers Editing by Kirsten Donovan and Mark Heinrich)

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