Sterling extended losses against the dollar and euro on Tuesday while British government bond yields tumbled to 2-1/2-year lows as money markets raised their bets on a Bank of England interest rate cut in the coming year.

Money markets that had assigned a roughly 40% probability to a December 2019 rate cut, raised this to 57% after a speech by BOE Governor Mark Carney who flagged uncertainties stemming from trade disputes and Britain’s departure from the European Union.

Over the next 12 months, they see a more than 80% chance of a 25 basis-point rate cut.

While Carney stuck to his line that the central bank could raise rates in event of a smooth Brexit, he noted growing risks from the U.S.-China trade spat and admitted investors were pricing in a rate cut.

Yields on 10-year British government bonds or gilts fell more than 8 basis points to 0.73% and were set for their biggest one-day fall in absolute terms since March. This would be the first time in a decade the 10-year yield is below the BOE’s main policy rate, according to Tradeweb.

By 15:30 GMT, the pound was down 0.4% at $1.2584, a new two-week low. Against the euro, it fell 0.5% to 89.66 pence.

Source : Reuters