Sterling falls as concerns linger over negative rates, Brexit transition

Sterling retreated below $1.23 on Wednesday as the dollar regained some strength and investors' focus shifted back to the possibility of negative interest rates in Britain.

Bank of England Chief Economist Andy Haldane on Tuesday played down the prospect of imminently taking rates into negative territory, saying that "reviewing and doing are different things." But analysts believe that once the talk of negative rates has taken hold in the markets, it would be hard to shift the focus away from it.

"The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates," said Derek Halpenny, head of research at MUFG. "We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation," he said.

Halpenny said he has gone short sterling/Japanese yen on a short-term basis "to capture the ongoing underperformance of the pound due to negative rate speculation". Britain's negotiator with the European Union David Frost reiterating on Wednesday that the UK will not extend the Brexit transition period beyond December also pushed the currency down.

Frost also repeated his position that at the moment the two sides are far apart and that the EU must evolve its position to reach an agreement with Britain. With talks to negotiate a post-Brexit trade agreement making no headway before a June deadline, Britain risks falling out of the European Union without a deal in place by end-2020.

"Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic," said Neil Wilson, chief market analyst at markets.com. "Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the Covid-19 pandemic and back into the cut-and-thrust of negotiations," Wilson said.

The pound was last down 0.5% at $1.2271 and shed 0.7% versus the euro to 89.68 pence, a five-day low. Apart from negative rates and Brexit, a high rate of COVID-19 related deaths and an astonishing amount of government debt were also weighing on sterling.

Britain is likely to run a budget deficit equal to 5% of gross domestic product in 2024, when Britain's next national election is due, the Financial Times reported.