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UPDATE 2-Sterling drifts lower as BoE policymakers warn of deeper economic damage

Wed, 2nd Sep 2020 12:28

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote
(Adds BoE speeches and updates prices)

By Olga Cotaga

LONDON, Sept 2 (Reuters) - Sterling fell against a
rebounding U.S. dollar on Wednesday but steadied against the
euro as Bank of England policymakers warned that Britain's
economy could suffer more damage than anticipated by the central
bank last month.

The BoE said in August it expected Britain's economy to
recover to its pre-COVID-19 size by the end of next year, but
Bank of England Deputy Governor Dave Ramsden told lawmakers
economic output would permanently be about 1.5 percentage points
lower than it would have been without the pandemic and another
interest-rate setter, Gertjan Vlieghe, warned of "a material
risk" it could take several years for Britain's economy to
return to full capacity.

BoE governor Andrew Bailey told the lawmakers in Wednesday's
closely watched online session that inflation might not be as
weak as estimated by the BoE last month, citing evidence that
many businesses had not passed on a value-added tax cut to

The speeches from five out of the nine Bank of England
monetary policy committee members were being scrutinised by
investors for fresh insight on negative interest rates and clues
to sterling's direction.

The BoE said last month negative rates are part of their
monetary tool box but that it saw no immediate case to cut
interests rates below zero.

Britain's central bank has taken rates to record lows and
ramped up bond purchases this year to support an economy hit by
the coronavirus and the exit from the European Union.

The speeches "are likely to keep the debate on negative
policy rates alive in the UK", said Adam Cole, chief currency
analyst at RBC.

Sterling fell 0.6% against the dollar to $1.3301,
having risen to an eight-month high above $1.34 the day prior.
The pound was flat against the euro at 88.97 pence, having risen
earlier in the day to a three-month high of 88.74 pence

"I wonder if yesterday's GBP/USD move finally flushed out
the last GBP shorts," said Kit Juckes, macro strategist at
Societe Generale.

Latest CFTC data showed that the leveraged funds held a very
small amount of sterling short positions in the week ending Aug.
25. Fresh data which will include Monday and Tuesday this week
will be released on Friday.

Trade-weighted sterling meanwhile remained
range-bound, and well below its pre-Brexit referendum level. The
fact that the real effective exchange rate in sterling is much
lower than that in sterling/dollar indicates the recent sterling
strength came solely on external factors.

"Sterling remains very weak in real effective terms which
means it can only go down with the help of big short positions,"
Juckes said.

Recent data painted a mixed picture of the economy.

British house prices hit an all-time high in August,
mortgage lender Nationwide said on Wednesday, adding to signs of
a sharp rebound in the housing market after the coronavirus

The minister of finance, Rishi Sunak, cut a tax for house
purchases in July as he sought to spark the broader economy
which shrank by a record 20.4% in the April-June

But industry data on Wednesday showed retailers discounted
their goods a bit more aggressively in August than in July as
they sought to lure customers back after the coronavirus
lockdown earlier in the year.

(Reporting by Olga Cotaga; Editing by Ana Nicolaci da Costa and
Elaine Hardcastle)

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