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Europe, Forex

Sterling falls after Javid comments stoke hard Brexit fears

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (Updates prices, adds comments)

By Yoruk Bahceli

LONDON, Jan 20(Reuters) – The pound fell on Monday after comments by UK finance minister Sajid Javid stoked fears about weak ties between Britain and the European Union following the country’s departure from the bloc.

In an interview with the Financial Times on Saturday, Javid said Britain would not commit to sticking to EU rules in post-Brexit trade talks.

That is a threat to businesses that want to ease cross-border checks with the EU once the transition period following Britain’s departure on Jan. 31 terminates at the end of the year.

A spokesman for Prime Minister Boris Johnson said on Monday that although there will be equivalence of rules at first after Brexit, Britain does not want alignment and would pursue a free trade agreement instead.

The pound was last down 0.1% against the U.S. dollar to $1.2997. It was flat against the euro at 85.25 pence.

“It’s about the UK diverging from Europe, and that would necessarily result in limiting access to European markets,” said RBC Capital Markets chief currency strategist Adam Cole. “Markets are taking that negatively.”

The focus this week will be on Friday’s PMI numbers, which analysts say are the remaining key data releases to gauge whether the Bank of England’s will cut interest rates at its Jan. 30 meeting.

“There is not a huge amount of downside to go for,” RBC’s Cole said of the data, given how high rate-cut expectations already are. “A bigger market reaction would be if the PMIs came in better than expected.”

Money markets currently price around a 65% chance of a quarter-point rate cut by the Bank of England to its 0.75% policy rate, slightly lower than around 70% at the start of London trading on Monday.

Data releases on Monday showed a boost for the prices of British houses on sale and household finances.

Jordan Rochester, FX strategist at Nomura, noted that these data releases, together with last week’s RICS housing market survey, which also showed a boost,, are usually correlated to the PMI numbers.

“What the market is looking for is a Boris bounce in the PMIs on Friday… The risk reward is that the data bounces on Friday enough to calm the Bank of England’s nerves to not cut rates; is why the market is moving the way it is,” he said.

Despite the potential rate cut and the future of Britain’s relationship with the EU, traders remain optimistic. They held the largest sterling long position in 21 months, at $2.57 billion, weekly data to Jan. 14 showed.

ING FX strategist Francesco Pesole said this was partly due to a widespread drop in speculative U.S. dollar long positions.

Sterling “downside potential may be exacerbated in the coming weeks should negative headline news persist, not least on a possible rate cut or on the UK/EU trade negotiations,” he wrote in a client note.

(Reporting by Andrew Heavens)


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