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Sterling under pressure vs dollar after GDP fall

25 January, 2012 - Reuters
  • UK GDP worse than forecast at -0.2 percent
  • Sterling falls vs dollar, more QE expected next month
  • Pound bounces vs euro after coming close to near 4-week low

By Nia Williams and Clare Kane

LONDON, Jan 25 (Reuters) - Sterling fell against the dollar on Wednesday, pressured by worse-than-expected gross domestic product data showing the UK economy contracted and signs that the Bank of England is preparing for another round of quantitative easing.

The pound recouped losses against the euro however, after falling to within sight of a near four-week low in early London trade as market players positioned for a weak GDP number.

Concerns about the European Central Bank having to write down its Greek bond holdings as part of a deal to avoid a disorderly default also weighed on the single currency.

UK GDP declined by 0.2 percent in the final quarter of 2011, coming in below forecasts of a 0.1 percent dip.

Bank of England minutes from the last policy meeting, released at the same time, showed members voted unanimously to keep total asset purchases at 275 billion pounds, although the minutes also said a further expansion of asset purchasing was "likely" to be required.

Sterling was last down 0.3 percent against the dollar at $1.5574, fading from a three-week high of $1.5629 hit overnight with traders reporting selling by a macro fund.

The euro reversed gains against the pound, falling from a session high of 83.85 pence, just below Tuesday's near four-week peak of 83.91 pence. It was last down 0.2 percent on the day at 83.23 pence.

Market players said sterling was oversold against the euro on some concerns of an even weaker GDP number. The fact that no BoE policymakers voted for an increase in QE this month - even though it is strongly expected in February - also lent some short-term support to the pound.

"There were a couple of calls of minus 0.7 percent from a couple of forecasters which maybe spooked people. There was definitely some chat of weaker numbers ahead (of the data) so I think that's why we've seen a bit of a bounce, combined with the minutes not guaranteeing any extension of QE," said Adrian Schmidt, currency strategist at Lloyds Bank.

There was little reaction in sterling to a CBI industrial trends survey that showed British factory orders shrank in January, though at a lower pace than forecast.

FEBRUARY QE EXPECTED

Market players are still expecting the BoE's Monetary Policy Committee to announce a further 50 billion pounds of quantitative easing next month.

In a speech on Tuesday BoE Governor Mervyn King said the central bank had scope to give the economy another cash boost if needed as inflation is falling and Britain faces an "arduous, long and uneven" economic recovery.

"If they are saying "likely" in the minutes that pretty much means definitely. That's a pretty strong word from the MPC who would normally sit on the fence," said Lee McDarby, head of corporate dealing at Investec Bank PLC.

Although the last round of QE in October did not weigh significantly on sterling, traders said the need for further economic stimulus added to a shaky outlook for the pound.

CitiFX Wire said in a note that traders thought sterling should be a sell on any near-term rallies, and would look to enter shorts above $1.5650 targeting a retracement to $1.5530/50.

The options market sterling/dollar one-month implied vols were trading at 8.2 percent, unchanged from Tuesday, while one-month risk reversals - a measure of relative demand for bets on a currency rising or falling - were steady at 0.6 in favour of sterling downside.

The next focus for market players is now the U.S. Federal Reserve, which is expected to begin a new practice of announcing individual policymakers' interest rate projections when its two-day meeting ends later on Wednesday.

Economists polled by Reuters expect the U.S. central bank will signal it is unlikely to start hiking interest rates until the first half of 2014, more than five years after chopping them to near zero.

(Editing by Anna Willard)

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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