By Ritvik Carvalho
LONDON (Reuters) - Sterling jumped higher against the euro and the dollar on Tuesday as comments from the Bank of England's governor on the viability of negative interest rates dampened some expectations of sub-zero rates in Britain.
Governor Andrew Bailey said on Tuesday there were "lots of issues" with cutting interest rates below zero and such a move could hurt banks.
Sterling, already benefiting from improved risk appetite, jumped further to hit $1.3608, up 0.6% on the day.
Against the euro, it rose half a percent to 89.49 pence.
Market pricing shows investors expect negative rates from Britain's central bank as early as May. Those expectations got pushed further out slightly after Bailey's comments.
"There were some expectations in the market that the BoE could soon move in this direction (of negative rates)," said Neil Jones, head of FX sales at Mizuho Bank.
"These headline comments have a put a dampener on negative rate expectations and participants are buying sterling back."
With Brexit largely in the pound's rear-view mirror, investors are focusing more intently on Britain's economy, which looks likely to tip back into recession. It shrank in the final quarter of 2020 and is expected to contract again the first quarter of 2021 - following a record fall of over 20% in output in the first two months of lockdown last year.
Finance minister Rishi Sunak warned on Monday that Britain's economy would get worse before it got better, with the country now in its third national lockdown and struggling to contain the spread of the coronavirus.
British consumer spending fell in December at the fastest rate in six months, with pubs and restaurants especially hard hit by a resurgence of coronavirus cases, a survey by payment card provider Barclaycard showed.
"Sterling is showing tentative signs of recovery despite the decent dollar momentum after a weak start to the year," strategists at ING said in a note to clients. "We maintain a rather optimistic near-term stance on sterling considering that the majority of bad news appears to be already in the price."