Sterling rises from one-week lows on double-barrelled policy response

U.S. one-hundred dollar banknotes are arranged for a photograph in Hong Kong on April 15, 2019.
Paul Yeung | Bloomberg | Getty Images

Sterling clung to most of its earlier gains on Wednesday after the British government unveiled a 30 billion pound ($39 billion) economic stimulus plan, hours after the Bank of England slashed interest rates to lift the struggling economy.

In a double-barrelled response to tackle the risk of a coronavirus-fuelled recession, the government announced the plan as part of a debt-fuelled investment surge after the central bank cut its key policy rate to 0.25%, lifting the pound from a one-week low hit in the previous session.

"The government has stepped up to the plate with support for the economy and the co-ordinated action with the Bank of England is encouraging," said Lee Hardman, a currency strategist at MUFG in London.

While a spurt of buying sent the pound up as much 0.7% to $1.2962 on the dollar in early trading, the momentum subsided by the budget announcement leaving the British currency up only 0.4% on the day at $1.2927 as the interest rate cuts were larger than expected.

The move, which chopped half a percentage point off the benchmark lending rate, took it back to a record low 0.25%. It was the BoE's first out-of-schedule cut since the global financial crisis in 2008.

Against the euro, its performance was more lacklustre, with the currency pair trading broadly steady around 87.43 pence.

Analysts at Commerzbank believe the rate cuts to be positive for the pound in the short term as the cuts indicate no further expansionary steps are imminently planned and authorities could take back today's steps after the coronavirus episode is over.

As well as the rate cut, the BoE said it would allow banks to release a special store of capital, known as the counter-cyclical capital buffer, so they can continue lending to households and businesses during the coronavirus epidemic.

New finance minister Rishi Sunak said he would help companies facing a cash-flow crunch, including a year-long suspension of a property tax paid by smaller firms, and funding for sick pay as part of his maiden budget plans.

The currency is down roughly 2.6% against the dollar since a general election in December ended deadlock over Brexit, although it had been clawing back ground until this week. Against the euro, it has dropped almost 4% over the last month.

"This is better package than we have had elsewhere (due to the range of measures)," Saxo Bank's head of European FX strategy John Hardy said.