Sterling bulls hit by BOE dovish shift, euro eyes GDP

SYDNEY Wed Aug 13, 2014 7:38pm EDT

1 of 3. One hundred dollar notes are seen in this photo illustration at a bank in Seoul January 9, 2013.

Credit: Reuters/Lee Jae-Won

SYDNEY (Reuters) - Sterling languished at four-month lows early on Thursday, having taken the honours of the worst-performing major currency after the Bank of England signalled it was in no hurry to raise interest rates.

The pound traded at $1.6688 GBP=D4 after suffering a 0.7 percent drop on Wednesday. It plumbed a near seven-week low at 80.20 pence per euro EURGBP=R and slid 0.7 percent on the yen to 170.79 EURJPY=R.

Wrong-footing the market again, Governor Mark Carney indicated that wage developments would be key to the exact timing of a rate move as the BOE slashed its forecast for wage growth.

Yet just a few months ago, Carney made sterling jump by warning investors that they were not sufficiently pricing in the chance of an early increase in record-low rates.

The setback in the pound helped the dollar index .DXY edge up 0.1 percent to 81.602. There was no notable action in the euro, which finished almost flat in New York at $1.3364 EUR= after drifting off a high of $1.3416.

Latest data showing a surprise contraction in euro zone industrial production in June kept alive expectations for more stimulus from the European Central Bank and was certainly of no help to the common currency.

The euro could easily retest a nine-month trough of $1.3333 set last week if the region's gross domestic product data due later in the day were to disappoint. ECONEUROPE

"We see little scope for positive domestic news for EUR/USD, with GDP data in particular looking vulnerable to a negative surprise. We remain short with a $1.32 target," analysts at BNP Paribas wrote in a note to clients. The news across the Atlantic was not much better with U.S. retail sales unexpectedly stalling in July, a sign perhaps that the economy was losing a bit of momentum.

All that combined to convince bond investors that any tightening by the major central banks is still a long way off.

German Schatz yields DE2YT=RR dipped below zero percent, while UK two-year Gilt yields GB2YT=RR fell to two-month lows of 0.702 percent. U.S. two-year Treasury yields US2YT=RR closed at a two-month trough of 0.4159 percent.

New Zealand's second quarter retail sales data provided a welcome contrast to the gloomy global backdrop. They rose 1.0 percent on the quarter and 3.8 percent versus the same period a year ago.

That gave the kiwi a small fillip, pushing it to a one-week high of $0.8490 NZD=D4.

(Editing by Eric Meijer)