Market News

 By Maiya Keidan

LONDON (Reuters) - Sterling erased earlier gains against the dollar on Tuesday after Bank of England Governor Andrew Bailey warned the economic recovery may not be as strong going forward and did not entirely rule out using sub-zero interest rates if needed.

Britain’s economic activity was probably about 7-10% weaker than before the coronavirus pandemic in the July-September period, Bailey said in an online speech to Queen’s University Belfast.

While he did not rule out using negative interest rates, he said the central bank was realistic about the potential challenges to the banking system.

Sterling was just 0.1% higher at $1.2844 by 1500 GMT after hitting $1.2902 earlier. It slipped 0.6% versus the euro to 91.4 pence as the single currency strengthened against the dollar

Trade had earlier opened on a more positive note as Britain kicked off three days of negotiations on its trade agreement with the European Union, with some analysts growing hopeful of a deal.

Talks on a joint legal text of trade agreement, which will also cover energy links and transport, will last until Friday morning. EU negotiators have signalled that they are willing to begin work on a joint legal text of trade agreement before talks resume, the Times reported on Tuesday.

“This week is a very, very important week for the pound as we slowly grind toward the day of true Brexit,” MUFG analysts said.

“In negotiations and given the political capital that (Prime Minister Boris) Johnson is losing in the fight against COVID we see the balance as having shifted more in favour of a deal.”

Some analysts noted, however, that Britain still faced a few sticking points on negotiations.

“There is cautious optimism but is there going to be significant progress made by Friday, that is the real question,” said Kenneth Broux, a strategist at Societe Generale.

“Clearly if there is enough progress by Friday, that will be bullish for the pound.”

Reporting by Maiya Keidan; Editing by Saikat Chatterjee, Ed Osmond and Alison Williams