European session review: GBP strengthens against USD and EUR as post-Brexit trade negotiations started and expectations of a BoE rate cut raised

GBP strengthened against USD and EUR in the European session on Tuesday as post-Brexit trade talks with the European Union (EU) began, while expectations of a BoE rate cut increased.

The first round of talks between Britain and the EU's executive arm, the European Commission kicked off on Monday and will last until Thursday. This round is the first of several, which are to take place before an EU-UK summit in June. Half a trillion euros worth of annual trade and close security ties are at stake. The UK's chancellor Rishi Sunak urged the EU to honour a June deadline for granting market access rights.

The EU said it was ready to give Britain beneficial access to its single market of 450 million consumers in exchange for guarantees that London would prevent dumping. But the UK's Prime Minister Boris Johnson has stated that Britain wants a relationship with Europe based on friendly cooperation between sovereign equals and will not be bound by EU rules or the jurisdiction of its top court.

Deepening concerns over the spread of coronavirus and the economic damage it could cause raised expectations that the world's central banks would cut their interest rates to limit the fallout, including possibly through coordinated action. The G7 finance ministers and central bank governors stated today that they are ready "to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase" and "to cooperate further on timely and effective measures".

The Bank of England's (BoE) governor Mark Carney told the UK's MPs on Tuesday he expected a “powerful and timely” global response to the economic hit from coronavirus. He added that the BoE stood ready to act.

Money markets see a more than 80% chance of a 25 basis point cut by the BoE on March 26. Meanwhile, two cuts are priced in by end-2020.

Market participants also received data from IHS Markit, which revealed that the UK's construction sector grew for the first time since April 2019 despite severe weather conditions in February. The IHS Markit/CIPS construction Purchasing Managers' Index (PMI) increased to 52.6 in February from 48.4 in January, signaling that the overall rate of construction output growth was the fastest for 14 months. The latest survey also pointed to the sharpest rise in new orders since December 2015.