FX round-up: Wuhan virus and rate cut speculation weigh on sterling

Sterling was trading on the back foot at the end of the week amid a risk-off environment as investors took stock of the new China coronavirus and the impact that it might have on that economy, and positioned themselves ahead of the central bank meetings in the UK and US that were scheduled for over the week ahead.

Better-than-expected readings on a key survey of economic activity in the UK failed to bolster the pound, which by 1905 GMT had surrender early gains to dip 0.10% to 1.1858 versus the euro, while against the Greenback it was off by 0.31% to 1.3079.

Survey compiler IHS Markit's composite output Purchasing Managers' Index for Britain's factory and services sector printed at 52.4 for January - its best print in 16 months.

That was much better than the 50.5 anticipated by economists and the prior month reading of 49.3.

Even so, IHS Markit's chief business economist, Chris Williamson, said the improvement in business confidence needed to pick up further "to ensure this solid start to the year has legs."

Analysts at Bank of America agreed, bringing forward their call for a 25 basis point cut in Bank Rate to 0.50% to 30 January, from May, but appeared at pains to stress that it would be an "insurance cut" to guard against continued sluggish growth.

In particular, BofA pointed out the lack of momentum and the minimal gains in employment signalled by the PMI, to which one had to add that policymakers at Bank had pretty much boxed themselves in by wat of their most recent remarks.

And analysts at Rabobank chimed in saying: "A variety of surveys shows that business optimism has recovered a bit following Johnson’s decisive election victory, but we find it hard to believe that this optimism will either be sustained or translated into increased levels of activity.

"If the MPC feels otherwise and therefore decides to keep Bank rate on hold, it won’t be long before a cut is on the table again."

BofA also expected the Bank of England would cut rates in August again, if not sooner should PMIs fail to accelerate sufficiently in February.

For their part, financial markets were pricing in roughly even odds of a cut.

Nonetheless, sterling's retreat was only slightly more pronounced than the falls in the euro and Japanese yen, which were both down by just over 0.2% against the US dollar at 1.1028 and 109.25, respectively.

Weighing on risk appetite more generally, and in turn boosting the US dollar, were reports of a third case of Chinese coronavirus in the US, with American health authorities said to be monitoring over 60 persons for a possible infection.