May 28, 2014 / 8:56 AM / 3 years ago

Sterling hits 2-week low vs dollar, as housing fervour cools

LONDON, May 28 (Reuters) - Sterling fell against the dollar and euro on Wednesday, dropping back further from recent multi-year peaks as traders cashed in on gains and reassessed some of the more bullish bets on the timing of the first move up in UK interest rates.

Figures this week showed UK mortgage approvals in April fell to their lowest level since August last year, suggesting the red-hot housing market, particularly in and around the capital London, may be cooling.

That view was backed up by the head of the country’s third-largest mortgage lender Nationwide, who told Reuters the market could be in the early stages of a “natural correction.”

Financial markets still widely expect the Bank of England to be the first major central bank to raise interest rates following the emergency post-crisis rate cuts to virtually zero. But it may not be this year, as some market participants had started to speculate.

Investors have bet more heavily on sterling rising than any other major currency in recent months. This week, however, they have started to pare back these bets.

“It’s all about positioning,” said Marvin Barth, a currency strategist at Barclays in London.

“The clear outperformer and everyone’s favourite in the first half of the year has been sterling. But people are getting a little bit nervous about these long positions given that the BoE seems to be right on (moderate-to-low) inflation ... and that means a softer outlook for rate hikes,” he said.

Sterling fell to a two-week low against the dollar in early trade on Wednesday, and at 0830 GMT was down a quarter of one percent at $1.6770.

The pound fell to a one-week low against the euro, with the euro up 0.2 percent on the day at 81.23 pence.

On a short-term technical basis, the euro broke above the 100-hour moving average resistance level on Wednesday around 81.15 pence. It is the first time in three weeks that resistance has been breached, suggesting the euro could rise further in the near term.

On the other hand, euro zone lending figures on Wednesday strengthened the case for the European Central Bank to ease policy next week to fight off the threat of deflation. (Editing by Jeremy Gaunt)

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