December 19, 2013 / 10:46 AM / 4 years ago

Sterling pauses after sharp rally, but UK recovery lends support

LONDON, Dec 19 (Reuters) - Sterling trimmed this week’s gains on Thursday after volatile overnight trading followed the U.S. Federal Reserve’s decision to cut bond-buying and the UK currency’s biggest daily rise in a month against the dollar.

UK retail sales data came mostly in line with expectations, defying some market expectations for a strong number after a dive in jobless numbers on Wednesday which drove the pound higher against both the dollar and the euro.

On balance sterling was buoyed by the Federal Reserve’s pledge to keep interest rates low well into 2015 than it was hurt by the its decision to withdraw some of its extraordinary monetary stimulus. It rose to $1.6486 on Wednesday after the Fed’s decision before giving up some of those gains.

“The message (from the Fed) was clear - even though we are slowing stimulus, we do not link that to rate rises any time soon,” said Jonathan Pryor, head of FX dealing for the corporate and institutional treasury team at Investec Bank.

“As a result we saw sterling/dollar volatility with almost a 1 percent swing in just over half an hour.”

Sterling was last trading 0.1 percent lower on the day at $1.6370, compared with $1.6386 before the UK retail sales data was released.

The pound has risen 0.8 percent against the dollar this year, with gains picking up in the last six months as the UK economy improved more than many of its European peers and investors priced in the chance of an earlier than expected rate hike by the Bank of England.

The BoE said in its forward guidance in August that it would not consider raising rates until unemployment fell below 7 percent, something it expected to happen by the end of 2016. It was forced to revise that message, stressing rates would not rise any time soon, after admitting unemployment could hit 7 percent as early as the fourth quarter of 2014.

After Wednesday’s data which showed the jobless rate at 7.4 percent, sterling overnight interbank average rates moved higher to price in the chance of a rate hike within 15 months, compared with two years before the data was released.

“We think that against the dollar, sterling does appear a bit overbought. In the near term we could see sterling give back some of its gains as the BoE will also try and reinforce a dovish message,” said Sasha Nugent at Caxton FX.

She added that the way the UK economy is holding up and the jobless rate was falling, the focus will turn to expectations of the BoE hiking rates in early 2015 while the Fed was still in the midst of withdrawing stimulus and well away from tightening.

“That should offer sterling a lot of support,” she added

The euro also gained around 0.1 percent against sterling, rising to 83.515. It posted its biggest daily loss against the pound in 10 months on Wednesday.

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