Sterling climbed above $1.30 on Tuesday for the first time in three weeks as investors pushed back expectations for when the Bank of England would cut interest rates below zero.
The pound gained 0.3% in early trading to touch $1.3006, the first time it had broken the mark since mid-September, before giving up its gains. It was last down 0.1% at $1.2962.
Money markets pushed back bets that Britain’s interest rates would turn negative, with investors now seeing rates falling below zero in May 2021. Previously they had expected the Bank of England to cut rates into negative territory in March.
The BoE, which cut interest rates to a record-low 0.1% in March, is looking at whether it is technically feasible to cut its main interest rate below zero, something that has already been done in Japan and the euro zone.
Bank of England rate-setter Jonathan Haskel said on Monday he saw downside risks to the economy – and also some possible benefits – from cutting interest rates below zero.
The BoE’s chief economist, Andy Haldane, and one of its deputy governors, Dave Ramsden, have expressed doubts about whether negative rates would be helpful. One external policymaker, Silvana Tenreyro, has been more supportive.
“They are still keeping the option open that negative rates could help support the recovery,” said Lee Hardman, currency strategist at MUFG.
Sub-zero rates would likely weaken the pound, at least in the short term, he added.
The pound was flat against the euro, last trading down 0.1% at 90.83 pence.
Also supporting sentiment was cautious optimism towards Britain’s trade talks with the European Union. Most analysts now expect London and Brussels to reach a deal before the transition deadline.
Still, Prime Minister Boris Johnson’s spokesman said on Monday the two sides needed to work as quickly as possible to reach an agreement by an EU summit on Oct. 15, with fisheries among the sticking points.
“It is in both sides’ interest to come to a deal,” Commerzbank analysts wrote in a note to clients.
“However, it is nonetheless uncertain as to whether the negotiations will lead to a deal, as France is now vehemently opposing any concession on fishing rights.”