Sterling edges up vs euro, BoE keeps rates on hold

Thu Dec 8, 2011 12:32pm GMT

Related Topics

* Bank of England keeps rates on hold at 0.5 pct

* Better rate differentials could weigh on euro/sterling

* Analysts: more QE likely next year

By Nia Williams

LONDON, Dec 8 (Reuters) - Sterling inched higher versus the euro on Thursday after the Bank of England kept interest rates on hold, with focus now switching to a European Central Bank rate decision that could reduce the premium for holding the single currency.

The BoE Monetary Policy Committee voted to keep interest rates on hold at 0.5 percent, reaffirming a commitment to easy monetary policy, and announced no change to its 275 billion pound asset purchasing programme.

The ECB, meanwhile, is seen cutting its own rates to 1 percent in a bid to stave off a deeper recession amid efforts to quell its two-year debt crisis.

There was little reaction in the pound to the rate decision given many investors had already positioned for it to be unchanged. The euro was last down 0.2 percent at 85.21 pence, in sight of a one-month low of 85.10 pence hit the previous session.

"There is nothing to get excited about with this decision, it was very much as expected. The focus is now on the ECB," said Michael Derks, chief strategist at FX Pro.

Analysts said sterling could rise against the euro if the ECB cuts rates. A break below Wednesday's low would put the euro on course to target the Nov. 10 trough of 84.86 pence, below which would mark the lowest level since March.

"Sterling may gain a bit of ground against the euro if the ECB cuts because on a carry basis there would be an improvement," said Jane Foley, senior currency strategist at Rabobank.

"Cable may also see a better day if there's an increased feeling of optimism in respect to ECB actions and political actions. If risk appetite does build, the likelihood is the dollar will suffer and cable will push higher."

Developments in Europe were seen as the key driver of sterling trade over coming sessions. Any sign that politicians will make progress in resolving the crisis at an EU summit on Friday would be likely to boost perceived riskier currencies.

Sterling was last flat at $1.5708 with traders citing good offers around $1.5750 and $1.58. Technical analysts highlighted resistance at $1.5740, the 55-day moving average, ahead of the late November high at $1.5780.

MORE QE SEEN NEXT YEAR

Market players said as the rate decision was already factored in to sterling prices, the release of the minutes of the meeting in around two weeks time would provide a better gauge of when the BoE may resort to another round of asset purchasing.

The central bank restarted its quantitative easing programme in October with a 75 billion pound cash injection and most analysts reckon it will wait until that round ends in February before extending it.

"There will be more asset purchases at some point next year, the UK economy is definitely fragile and needs easing," said Ankita Dudani, G10 currency strategist at RBS.

Although QE would usually be seen as negative for sterling because it involves flooding the market with pounds and reducing demand, Dudani said the UK currency could buck that trend.

"Now it's more of a case of which central bank has the independence and capacity to do what is needed to help the economy. At least the BoE is able to do what is required," she said. (Editing by Toby Chopra)

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