Sterling knocked by EU legal action against Britain, Treasury yields surge

By Joice Alves

LONDON (Reuters) - Sterling fell again on Monday amid the recent rise in U.S. Treasury yields and as the European Union launched legal action against unilateral British changes to Northern Irish trading arrangements.

The bloc sent a letter of formal notice to kick-start an "infringement procedure" as Brussels said the changes to arrangements breach the Brexit deal signed last year.

"The downside risks posed to the UK's economic outlook from these developments are being reflected in the pound this afternoon," said Simon Harvey, Senior FX Market Analyst at Monex Europe.

The pound was down 0.6% at $1.3885 at 1642 GMT, after touching a three-session low of $1.3854.

Adding pressure to the pound, a sell-off in Treasuries, which pushed the yield on the benchmark note above 1.60% since Friday, strengthened the dollar. Sterling fell more than 1 cent to $1.3865 during Friday's session.

Versus the euro, sterling hit on Monday a one-week low of 86.00 pence at 1532 GMT, and it was last down 0.1% at 85.90 pence.

But amid hopes for a relatively fast economic recovery following a speedy coronavirus vaccination programme and declining numbers of cases in Britain, the outlook for sterling remained positive, analysts said.

Bank of England Governor Andrew Bailey said on Monday he was now more positive about the British economy as the novel coronavirus was in retreat, though he cautioned that the COVID-19 effect was huge.

Markets are looking to the BoE’s announcement on Thursday, but there is no expectation that the bank will "outline a tapering of asset purchases yet", said Shaun Osborne, Chief FX Strategist at Scotiabank in a note to clients.

Sterling has gained almost 5% against the euro in the past three months and 3% versus the dollar as more than 24 million people have received at least one vaccine dose in Britain. [nS8N2K2097]

Also buoying the pound this year are dwindling expectations that the BoE will push interest rates below zero, and the Brexit trade deal with the EU agreed in December.

An Accenture survey showed on Monday that British businesses are more likely to expect a rebound in activity this year than their counterparts abroad, and expectations of a pick-up in growth are stronger than at any point since 2015.

(Editing by Kirsten Donovan and Ed Osmond)