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