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Sterling hits 2-week high vs dlr, UK economy outlook shaky

24 January, 2012 - Reuters
Updates prices, adds details)
  • Sterling rises to $1.5602, highest since Jan. 5
  • Euro/sterling to take cue from Greek talks
  • UK GDP data and BoE minutes to hold sway

    • By Nia Williams

    LONDON, Jan 23 (Reuters) - Sterling hit a two-week high against the dollar on Monday as tentative hopes for a Greek debt deal put broad pressure on the U.S. currency, although speculation about further quantitative easing by the central bank limited sterling gains.

    The pound lost ground against the euro, with the cross set to take direction from talks between Greece and private creditors on the terms of restructuring the country's debt.

    Euro zone finance ministers will decide on Monday what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens, after negotiators for private creditors said they could not improve their offer.

    Sterling was last up 0.1 percent at $1.5588, having risen to a session peak of $1.5602, its highest level since Jan. 5. Traders cited steady demand from a UK clearer, although gains were capped by offers said to be above $1.5600. On the downside, option expiries at $1.55 could check losses, traders said.

    The euro was up 0.7 percent at 83.66 pence , tracking strength in euro/dollar , which was lifted by Middle East buying and broad short covering. Hopes of a breakthrough in the Greek debt wrangle were supporting both risk sentiment and the euro, market players said.

    "Today's move up in euro/sterling has mainly been the move in euro/dollar feeding through as we have seen a bit of optimism towards a Greek PSI deal," said Michael Sneyd, currency strategist at BNP Paribas.

    Traders were also wary of going long on the U.S. dollar ahead of a meeting of the Federal Open Market Committee this week, which added to dollar weakness against both the euro and sterling.

    The Fed will begin on Wednesday publishing interest rate forecasts from individual committee members. The move will help shape investor expectations and possibly be used to signal that the Fed plans on keep rates at extremely low levels for an even longer period.

    GDP, MINUTES

    Closer to home, fourth-quarter UK GDP data on Wednesday is expected to show the economy contracted, a factor that is likely to undermine sterling.

    Bank of England Governor Mervyn King is also due to speak this week while the minutes from the most recent BoE Monetary Policy Committee meeting on Wednesday are likely to reinforce expectations for further asset purchases.

    "If the PSI comes out with positive news over the next couple of days and King is very dovish we could see euro/sterling continue to rally from here," said BNP Paribas's Sneyd.

    Worries about the UK's outlook persist as austerity measures and spillover effects from the euro zone debt crisis hang over the economy, prompting speculation the Bank of England will announce it will buy billions of pounds more gilts - quantitative easing (QE) - as early as next month.

    Many investors were cautious about pushing the pound up further against the under-pressure dollar on growing concerns the central bank will have to inject further cash into the fragile UK economy.

    "This keeps us cautious on cable even though the exchange rate has rallied from $1.53 to almost $1.56 this month," said Mansoor Mohiuddin, head of fx strategy at UBS.

    As such, some strategists recommend selling sterling into the latest rally. Morgan Stanley said they used the current rebound to re-initiate sterling/dollar shorts at $1.5570.

    Latest data from the Commodity Futures Trading Commission showed speculators had extended their bearish positions against sterling. Their net short positions rose to 41,634 contracts in the week to Jan. 17, up from 35,853 contracts a week earlier.

    Additional reporting by Anirban Nag; Editing by Catherine Evans)

    Copyright Thomson Reuters 2012. All rights reserved.

    The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.

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