Sterling edges lower as BoE mulls sub-zero rates, PMI data

Sterling edged lower on Thursday against both the US dollar and the euro as a combination of business activity data and the risk of sub-zero interest rates weighed on the pound.

IHS Markit’s flash PMI data showed Britain’s economy flattened out a bit this month from its nosedive in April caused by the coronavirus lockdown, but remains in the grip of a severe contraction.

A drop in inflation fuelled speculation this week that the Bank of England might cut interest rates below zero to bolster an economy hammered by the coronavirus pandemic.

Bank of England (BoE) Governor Andrew Bailey said he was less opposed to negative interest rates than he was before the pandemic.

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Michael Hewson, chief market analyst at CMC Markets UK, said that before hypothesising about the risks of deflation the BoE needed to consider that prices are already going up.

“Maybe our esteemed central bankers might do well to get out of the ivory towers of Threadneedle Street,” said Hewson.

“Prices in the shops are already starting to rise, as anyone who has been in a supermarket recently will tell you,” he added.

Sterling is falling for a second consecutive day and has dropped nearly 3 per cent against the dollar in May.

The pound was last down 0.2 per cent versus the dollar at $1.2214 , and down 0.1 per cent against the euro to 89.81 pence after touching 90 pence, its weakest since March 27th.

The pound is in the lower band of its recent trading range, as Britain remains one of the countries most affected by the pandemic. The UK's death toll from COVID-19, the disease caused by the new coronavirus, has topped 40,000, by far the worst yet reported in Europe.

"Pressure on the pound is coming from two main sources; building tensions in Brexit negotiations and a change in tone from the Bank of England regarding monetary policy," said Daragh Fitzgerald, head of foreign exchange at Bank of Ireland. "While Irish businesses will be focused on bouncing back from the Covid-19 crisis, Brexit uncertainty and currency volatility could be another complicating factor as we exit lockdown in the weeks ahead." – Reuters