Sterling clings to 3-week highs, unfazed by Sunak's new economic plan

LONDON: Sterling was steady at $1.2550 and at 89.90 pence against the euro on Wednesday, a day after hitting three-week highs against both currencies, unmoved by Chancellor Rishi Sunak's announcement of his plans to revive the economy.

In an afternoon speech, the British finance minister said the government would pay bonuses to employers to bring workers back to their jobs from the state's coronavirus emergency furlough scheme.

He also said the government would cut value-added tax (VAT) on spending at hotels, restaurants and tourist attractions and subsidise temporary discounts on eating out to boost demand for services hardest-hit by the COVID-19 lockdown.

"Sterling's unfazed reaction to Sunak's fiscal stimulus measures is in part due to the rally seen in the pound during yesterday's session, with programmes such as the Kickstart Scheme and Green Homes Grant already being public knowledge," said Simon Harvey, currency analyst at broker Monex Europe.

"Additionally, today's measures have an unknown impact on the UK economy and whether they will be sufficient to rejuvenate a battered hospitality and retail sector," he said.

"Namely, will businesses pass on the VAT tax cut to consumers to promote demand or use it to repair balance sheets, and is a £10 discount enough to encourage consumers to head out and face the risks of the virus?"

Sunak also temporarily scrapped a property tax on purchases of homes costing up to 500,000 pounds.

"The limited reaction in the pound suggests markets aren't counting their chickens before they hatch," Harvey said.

Analysts had predicted prior to the announcement that there would not be much reaction in the pound, with the market also focused on renewed Brexit talks this week.

British and European Union negotiators kicked off the talks on Tuesday, with the top EU official saying he wanted a deal, "but not at any price".

Last week's talks were cut short with both sides saying they had yet to overcome the gulf in positions that could see Britain leaving a status quo transition period at the end of this year without a trade deal.

Britain is prepared to leave the EU on the same terms as Australia has with the bloc if it cannot agree on a future trading deal, Prime Minister Boris Johnson told Germany's Angela Merkel in a telephone call on Tuesday.

"Brexit, the path for the UK economy and the UK fiscal story are all sagas that will take a long time to come to a conclusion," said Stephen Gallo, forex analyst at Canadian bank BMO. "Few people want to take on much UK-specific risk right now, so asset prices simply aren't moving much."