Sterling holds above $1.29 as dollar weakens, sold off against other currencies

By Olga Cotaga
·2 min read

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

By Olga Cotaga

LONDON, Feb 27 (Reuters) - The pound bounced back above $1.29 on Thursday because of broad-based dollar weakness.

But investors were selling the pound against other major currencies as disappointment grew over the prospect of Britain's new finance minister not providing the fiscal stimulus he had been expected to next month.

The new chancellor of the exchequer, Rishi Sunak, has been told by Treasury officials there is no way of simultaneously increasing public spending as quickly as Prime Minister Boris Johnson would like, keeping taxes down and adhering to new Treasury fiscal rules that allow borrowing only for capital investment, the Financial Times reported.

Because of this, Sunak could postpone loosening fiscal policy until later in the year. The possibility of him loosening fiscal policy was the main reason why the pound strengthened in recent weeks, despite concerns that Britain may not agree a trade deal with the European Union by the end of this year.

The pound was last rising 0.2% to $1.2922, but against the euro it fell 0.4% to 84.67 pence. It was also weaker against the safe-haven Japanese yen, which rose to a two-week high of 142.30 versus the pound.

"I would expect the pound to lag in a general dollar selloff and perform poorly against other crosses," said Neil Jones, head of hedge fund sales at Mizuho.

Sterling has also been supported lately by good economic data, but Jones said: "I expect that the upside surprise (from economic data) will deflate."

Money markets have started to price in a higher chance of an interest rate cut by the Bank of England, which could be forced to step in to boost the economy if the data worsen and Sunak does not stimulate growth through higher fiscal spending.

There is a 25 basis points cut to the current 0.75% rate priced in by August this year.

"No big fiscal push means that if there's a slump, the burden of reviving the economy will fall on monetary policy," said Marshall Gittler, who heads the analytical firm BDSwiss. (Editing by Timothy Heritage)