FOREX-Sterling slides after BoE, euro falls before Draghi

Thu Jul 4, 2013 8:05am EDT

Related Topics

* Sterling slides on BoE concern about rise in bond yields

* BoE, ECB leave rates unchanged

* Euro dips versus dollar before Draghi news conference

* Draghi expected to sound a dovish tone

By Jessica Mortimer

LONDON, July 4 (Reuters) - Sterling slid sharply after the Bank of England expressed concern on Thursday about rising bond yields and the euro fell against the dollar before a news conference by European Central Bank President Mario Draghi.

The BoE left policy unchanged, but said the implied rise in the expected future path of interest rates was not warranted by the state of the economy and could weigh on the growth and inflation outlook.

Sterling fell 1.3 percent on the day to hit $1.5074, its lowest since late May.

The euro was last at $1.2990, down 0.1 percent, after the ECB left interest rates on hold, as expected. A downbeat tone from Draghi at a news conference beginning at 1230 GMT could see it drop towards Wednesday's low of $1.2923, its weakest since late May.

Many traders expected Draghi to highlight the difference between monetary policy in the euro zone and the United States, where stimulus is expected to be scaled back later this year. But if he does not, the euro could rebound, they said.

The euro rose more than 1 percent to a 2 1/2-month peak against sterling of 86.34 pence.

"The market is dominated by sterling after the BoE," said Paul Robson, currency strategist at RBS. "I see general downside for the euro today. I think, like the BoE, the ECB will want to temper market enthusiasm for higher rates and will want to put clear water between it and the Federal Reserve."

Trading volumes were light due to a public holiday in the United States and this could lead to volatile price action. Some investors were wary of taking big positions before monthly U.S. jobs data on Friday, which would lift the dollar if it was strong.

The euro was down 0.2 percent at 129.71 yen.

"The likelihood of a dovish statement from the ECB is high," said Hans Redeker, head of global foreign exchange strategy at Morgan Stanley. He added there was a chance the ECB could issue forward guidance on monetary policy which would hurt the euro.

The dollar index, which measures the U.S. currency's value against a basket of currencies, was up 0.2 percent at 83.383, near a five-week high of 83.717 hit on Wednesday.

But the dollar fell 0.1 percent against a broadly firmer Japanese yen to 99.81 yen.

The Australian dollar rose 0.4 percent to $0.9121, off a recent three-year low of $0.9036, after the country's central bank deputy governor said markets had misinterpreted remarks about its latest policy meeting.

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