By Amanda Cooper LONDON, Feb 28, (Reuters) - The pound edged up on Tuesday, drawing some strength from Britain's agreement with the European Union on post-Brexit trade, but it was still heading towards its largest monthly loss against the dollar since September.
British Prime Minister Rishi Sunak struck a deal with the European Union on Monday to ease restrictions on trade between Northern Ireland and Britain, and to give lawmakers on the ground a greater say over the rules and regulations they follow from Brussels.
The deal seeks to resolve the tensions caused by the Northern Ireland protocol, a complex agreement that set the trading rules for the British-governed region that London agreed before it left the EU but now says are unworkable. The pound rose by as much as 1.1% against the dollar and gained 0.5% against the euro after Sunak's announcement.
The cost of insuring British government debt against default dropped to its lowest in three weeks on Tuesday and was only narrowly above January's five-month lows, reflecting greater investor confidence. Sterling was up 0.2% against the dollar at $1.2086 and up 0.2% against the euro with one euro at 87.79 pence.
But analysts said that any boost from the newly minted post-Brexit rules would likely not last, given the economic outlook.
"The central bank story should instead remain the most central driver of sterling, and given the lack of data today, markets will watch three Bank of England speakers today: Jon Cunliffe, Huw Pill and Catherine Mann," ING strategist Francesco Pesole said.
Against the dollar, sterling has lost 1.9% in value in February, its biggest one-month slide since the near-4% drop in September to record lows. It has fared better against the euro , having risen by 0.3%, marking a second monthly increase.
This is mostly down to a slew of strong U.S. data this month that has forced investors to position themselves for interest rates to rise a lot more than many previously anticipated and to rule out any prospect of rate cuts this year.
The Bank of England signalled at its last meeting that it expected to end its current cycle of rate rises in March. But with inflation still in double digits and a seemingly robust labour market, expectations for UK rates have shifted too.
Industry data on Tuesday showed UK grocery inflation hit 17.1% in the four weeks to Feb. 19, another record high, thanks to sharp price rises in the cost of milk, eggs and margarine.
"A 25-basis point move in March is fully in the price, and the debate appears to be much more centred on whether the Bank will need to keep tightening beyond March: markets are definitely swinging on the hawkish side, expecting a total of 80bp of tightening before reaching a peak," ING's Pesole said.
Markets expect UK rates to peak around 4.8% by the end of the year, up from 4.0% now. At the beginning of the month, the expected peak was just 4.0%.
The Institute for Fiscal Studies (IFS) said on Tuesday the fiscal outlook remained much darker than at the time of Britain's last full budget a year ago, and while energy prices had fallen, the weak economic outlook was likely to weigh on public finances in the longer term.
"That medium-term outlook is what really matters when it comes to making a case for any ... permanent tax cuts or permanent increases to spending," said Isabel Stockton, a senior researcher at the think tank.
