UPDATE 1-Sterling weakens as investors become less convinced Sunak will unleash strong fiscal stimulus

The pound fell on Wednesday on expectations the Bank of England could cut interest rates in the following months and that finance minister Rishi Sunak's budget announcement in March may dissapoint those who were waiting for a pick-up in fiscal spending.

The spread of the coronavirus has led some investors to believe central banks will be forced to loosen monetary policy to shield their economies. In Britain, money markets are pricing in a 25-basis-point cut to the current 0.75% rate by August. Moreover, finance minister Rishi Sunak is due to announce the newly formed government's budget on March 11, but some analysts are doubtful there would be enough increases in spending to stimulate the economy and push up the pound, as was previously expected.

The Institute for Fiscal Studies think tank said on Wednesday that Sunak should resist the urge to rewrite Britain's fiscal rules before the budget and that he should make plain that any spending increases will mean more tax. "My sense is the market is pulling back on long pound positions originally destined to run into an upbeat expansionary fiscal stance in next month's budget," said Neil Jones, head of hedge fund sales at Mizuho.

Sterling was last down 0.5% at $1.2936 and by the same extent versus the euro at 84.07 pence. An analyst at a major investment bank speaking on background said central banks were buying euro/sterling as the end of the month approaches, a normal type of behaviour. Investors held $2.38 billion in long sterling positions at the end of Feb. 18, which suggests there was room for the positions to be unwound this week.

Still, the pound was not far from its February highs and by comparison, when Prime Minister Boris Johnson's Tories won December's election, strengthening his grip on parliament and removing some Brexit uncertainty, the pound was trading around 83 pence per euro. "Market participants remain less concerned by Brexit risk as evident by the sharp decline in pound volatility since last year’s election," said Derek Halpenny, head of research at MUFG. "At the same time.

Market gauges for implied volatility in sterling for all tenures, including one-month and one-year options contracts, are much lower than they were a couple of months ago. Marshall Gittler, an analyst at BDSwiss, said he believed it was "only a matter of time before the market notices sterling’s resilience and decides to test it."