Sterling pares losses on UK finance data but stays vulnerable

Thu Feb 21, 2013 6:39am EST

Related Topics

* Sterling inches higher vs dollar and euro on UK data

* UK public finance better than expected, shows surplus

* Sterling recovers from 2-1/2 year low of $1.5130

* Analysts say sterling still vulnerable to easing prospects

By Anooja Debnath

LONDON, Feb 21 (Reuters) - Sterling trimmed its losses against the dollar and rose against the euro on Thursday on better-than-expected UK public finance data, but will likely stay weak due to the central bank's inclination to loosen monetary policy.

Britain's public finances showed a large surplus in January, which briefly buoyed the currency, although challenges for the government to meet its full-year budget goals remain.

Sterling was down 0.1 percent on the day at $1.5223, recovering from a 2-1/2 year low of $1.5130 hit earlier in the day with traders citing a U.S. macro hedge fund as the main buyer of sterling/dollar this morning.

The pound slipped to its lowest level since July 2010 after minutes of the Bank of England's latest policy meeting showed outgoing Governor Mervyn King and two others voted to relaunch asset purchases under its quantitative easing (QE) programme.

BoE minutes contrasted with U.S. Federal Reserve's policy minutes showing some policymakers thought bond-buying should be stopped or slowed which helped to push sterling even lower against the dollar.

The BoE also indicated it is prepared to allow inflation to remain above its 2 percent target beyond the two-year horizon outlined in its mandate.

"Sterling's gone a long way. Clearly, there is some momentum in this move down and that has been driven by the BoE's tolerance towards above-target inflation levels," said Kiran Kowshik, currency strategist at BNP Paribas.

Strategists said the July 2010 low of $1.5125 could act as support but if sterling broke below $1.50, it could easily slide towards $1.45.

However, Kowshik said sterling's losses could see a brief pause for now.

"The downside risks to sterling are there for the next few weeks but for today the moves seem to have gone too far too fast and people are getting on this trade, I'd say it is a bit overdone and sterling could stabilise a bit here."

The pound rose against the euro on sluggish euro zone economic data. The euro was down 0.7 percent on the day at 86.55 pence, a session low, moving further away from a near 16-month high of 87.645 pence on Wednesday.

STERLING STRUGGLES

The British currency's outlook has been bleak due to fears of a downgrade of the UK's triple-A credit rating and deteriorating economic conditions.

Bank of England policymakers considered expanding the range of assets they purchased under QE - typically negative for a currency because pumping more money into the economy increases the supply - and cutting interest rates.

With the Bank of England hinting at the possibility of ramping up its quantitative easing programme, while some in the Fed voiced concerns about keeping the stimulus taps running for much longer, the pound's weakness is likely to persist.

"The intensity of the sterling move lower in the last 24 hours has been a toxic mix of the BoE voting to do a little bit more quantitative easing and the Fed saying they might end their (bond purchases)," said Kathleen Brooks, research director at Forex.com.

"The Fed minutes suggested that their balance sheet could shrink faster than the BoE's."

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