June 17, 2020 / 8:34 AM / 16 days ago

Sterling edges lower after inflation data and Brexit fears weigh

LONDON (Reuters) - Sterling weakened slightly on Wednesday after data showed inflation in Britain fell last month to its lowest level since June 2016 as the coronavirus pandemic sucked demand from the global economy and caused oil prices to tumble.

FILE PHOTO: UK pound coins plunge into water in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic/Illustration

Low inflation could give the Bank of England room to ramp up its stimulus programme when its policymakers meet on Thursday. The central bank is expected to announce an increase of at least 100 billion pounds in its bond-buying firepower.

Sterling was last trading down 0.3% at $1.2541 against a broadly stronger U.S. dollar and was 0.1% lower versus the euro at 89.51 pence.

“Sterling is struggling to join the G10 rally today as stalling Brexit negotiations keep the macroeconomic outlook uncertain and the upside for the currency limited. This morning’s inflation data hasn’t helped the pound’s prospects but instead adds to the anticipation that the Bank of England will extend its Asset Purchase Facility tomorrow,” said Simon Harvey, currency analyst at broker Monex Europe.

“The depth and duration of such an extension are unknown at present, but given the recent run of data, the Bank could have a few tricks up its sleeve,” Harvey said.

The pound has risen more than 4% against the U.S. dollar in the last three months but is still far off levels seen before the new coronavirus sent global markets tumbling in March.

It is also much lower in trade-weighted terms than it was before the Brexit referendum in June 2016.

Graphic: Pound lower than before Brexit referendum - here

Brexit uncertainties are still weighing on the pound though British and EU leaders agreed on Monday that talks on their future relationship should be stepped up. British Prime Minister Boris Johnson suggested an agreement could be reached in July.

With a status-quo transition deal set to expire at the end of the year, Britain is seeking a free trade agreement with the EU, which it left on Jan. 31, but negotiators have so far made little progress.

Talks on the future relationship will enter a hot phase from September, a German government document reviewed by Reuters showed.

Johnson said on Wednesday that Britain could deal with its economy in “a creative and constructive way” after a status quo transition with the European Union finishes at the end of this year.

Britain also announced on Wednesday it would pursue accession to a revamped version of the Trans-Pacific Partnership that links Canada and 10 other countries.

Reporting by Olga Cotaga; Editing by Catherine Evans and David Clarke

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