European session review: GBP mixed amid heightened expectations of a BoE rate cut

GBP traded mixed against other major currencies in the European session on Wednesday amid heightened expectations the Bank of England (BoE) could follow the U.S. Fed and make emergency rate cut in response to growing worries about the economic fallout from the coronavirus outbreak. While GBP strengthened against EUR and the safe-haven JPY and CHF, it fell against the rest of major rivals.

The Federal Reserve announced an unexpected half-percentage point interest rate cut on Tuesday. That was the first emergency rate cut since the global financial crisis of 2008, which also marked the biggest one-time cut since then. Fed's Chair Jerome Powell noted the U.S. economy remained strong but said it was difficult to predict the "magnitude and persistence" of the effects of the fast-spreading virus.

According to the CME BoEWatch Tool, money markets are now seeing 84% chance of a 25 basis point cut by the BoE on March 26, up from a probability of 80% prior to the Fed emergency cut. Meanwhile, almost two cuts are priced in by end-2020, compared with none a few weeks ago.

Market participants also received data from IHS Markit, which revealed that the UK's service sector growth slowed in February due to a negative impact on sales from the coronavirus outbreak. The IHS Markit/CIPS services purchasing managers' index (PMI) fell to 53.2 in February from 53.9 in January. Still, the latest reading was the second-highest since September 2018 amid receding political uncertainty and strong domestic economic conditions.