Sterling ticks lower as banking turmoil clouds rate outlook

By Amanda Cooper and Samuel Indyk LONDON, March 16 (Reuters) - The pound eased on Thursday, losing out to the euro ahead of the European Central Bank's policy decision later in the day, but held steady against the dollar, as a degree of calm returned to global markets. Sterling was last down just 0.1% against the dollar at $1.2048, easing for a third day in a row, while against the euro it sank 0.4% to 88.06 pence. A little more stability crept into markets after Credit Suisse said it would use a $54-billion lifeline from the Swiss National Bank to shore up liquidity and restore investor confidence that has taken a bashing this week as problems at Switzerland's second-biggest bank have mounted. The pound drew little comfort from Jeremy Hunt's spring budget the day before, in which the UK finance minister said the economy would avoid recession this year. "The chancellor’s budget statement yesterday was overshadowed by the focus on European banks but the pound's undertone is typically not determined by the government’s fiscal policy anyway," Scotiabank chief FX strategist Shaun Osborne said. "The statement ticked most of the expected boxes but whether Hunt's plans can lift UK growth as he intends remains to be seen. What is clear from the numbers is that the UK’s overall fiscal position remains weak and there is little margin for the government to negotiate unexpected developments," he said. The broader market turmoil induced by the failure of three U.S. lenders in the last week has been compounded by the issues at Credit Suisse and muddied the outlook for monetary policy.

Traders had already attached a strong chance the Bank of England (BoE) would leave UK rates unchanged when it meets next week, with the possibility of a rise of just 25 basis points (bps). That probability is now split 50/50, according to Refinitiv data. "Sterling markets will continue to digest yesterday’s Budget delivered by Chancellor Jeremy Hunt as well as the broader global environment. Markets remain ambivalent whether the Bank of England will raise interest rates next week," said Hann-Ju Ho, senior Economist, Commercial Banking at Lloyds Bank.

The European Central Bank (ECB), meanwhile, is a little behind the BoE in its quest to fight inflation. Traders attach a 60% chance of the ECB raising rates by 50 bps on Thursday, with a 40% chance of 25 bps. Money markets show investors expect ECB rates to peak around 3% later this year, compared with a peak of 4% just over a week ago. The BoE, meanwhile, could well leave rates where they are at 4%, compared with expectations last week for a peak of closer to 4.8%. With so much investor anxiety centred on the health of banks right now, in addition to a steer on the rate outlook, ECB President Christine Lagarde could be under pressure to signal what the central bank is prepared to do to offer support. "If the early morning rally reverses, or the markets take fright post-ECB, it’s possible that we may get a joint statement from the world’s major central banks later in the day stressing their commitment to being a lender of last resort and maintaining global liquidity through FX swap lines," Capital Economics said in a note. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: World FX rates in 2023 Graphic: Trade-weighted sterling since Brexit vote ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Amanda Cooper; Editing by Mark Potter)

Reuters

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Sterling ticks lower as banking turmoil clouds rate outlook

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