Pound falls after Carney says BoE could respond promptly to economic weakness

LONDON (Reuters) – Sterling fell to a near two-week low against the U.S. dollar after Bank of England Governor Mark Carney said there could be a “relatively prompt response” from the bank if it looked like the economy faces a period of prolonged weakness.

“With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” Carney said in a speech at a BoE event on inflation targeting.

Sterling fell 0.5% to $1.3028, its lowest level since Dec. 27.. It also fell against the euro, down 0.4% at 85.17 pence.

British government bond yields fell, with two-year gilt yields last down almost 5 basis points on the day at 0.59%. Bond yields move inversely with prices.

Money markets currently price a roughly 60% chance of a 25 basis point interest rate cut by December, versus just over 50% at the end of 2019.

A number of weak data releases have come out of the UK in recent days. The latest showed British shoppers cut back on spending in late 2019, rounding off the weakest year since at least the mid-1990s for retail sales as measured by an industry group, which blamed uncertainty about Brexit and last month’s election for the slump.

The pound has already been weak despite other safe-haven currencies paring back gains as fears of a military escalation between the U.S. and Iran have eased after the killing of a key Iranian general last week.

Pound investors are also looking ahead at the challenges Britain and the European Union face in agreeing a new trading relationship, after the UK parliament votes later on Thursday on Prime Minister Boris Johnson’s withdrawal deal.

Approval of the bill, which markets have priced in since Johnson’s landslide win in a December general election, will help the country leave the EU in an orderly way.

But attention is shifting to what Britain’s relationship with Europe will look like following its expected EU departure on Jan. 31, when it begins an 11-month transition period – a short time in view of the expected complexity of the talks.

Johnson has said he will not ask for an extension of the transition period beyond 2020, while the EU has said that it would be “basically impossible” to negotiate all aspects of the relationship by the end of the year.

The EU’s chief Brexit negotiator Michel Barnier said on Thursday that the level of access for British products to EU markets will be proportionate to the UK’s level of ambition to keep EU standards.

“From a market perspective the passage of the withdrawal bill is very much locked in and it’s unlikely to have a material impact in itself,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

“Markets have already moved on from debating and discussing … the withdrawal process and are now perhaps considering the ramifications of phase two, in terms of negotiations with the European Union,” Stretch said.