Sterling rallies versus dollar, lags euro on Draghi comments
LONDON (Reuters) - The pound jumped against the dollar on Thursday but lagged the euro, pegged back by expectations of further monetary easing by the Bank of England and risks that the UK could lose its top-notch credit rating amid a rapidly deteriorating economic outlook.
The euro and most currencies seen as riskier bets including the British pound rose sharply against the safe-haven dollar after European Central Bank President Mario Draghi sent a strong signal that policymakers were ready to act to save the single currency.
Traders said his comments could be a precursor to more support measures from the ECB, driving investors to unwind large bearish bets both in the euro and the British pound. Investors have been preferring the safe-haven dollar and the yen in recent months on growing signs of a global slowdown and as the euro zone debt problems intensified.
"Draghi's comments have moved markets but I think both the euro/dollar as well as sterling/dollar at these levels offer a good opportunity to sell," said Richard Driver, currency strategist at Caxton FX.
"We are still looking for cable to drop towards $1.54 in the coming week. Markets are looking at excuses to buy into risk-related currencies but economic fundamentals and the flows suggest that the dollar will be supported."
Against the dollar, the pound jumped to its highest in nearly a week, rising around 1.4 percent on the day to $1.5724, and well above a two-week low of $1.5458 struck earlier in the day. Traders cited near-term support at $1.5393 - the low struck on July 12.
The euro held on to the previous day's gains against sterling, trading near a one-week high and well above Monday's trough of 77.56 pence, its weakest since late 2008. It was last down 0.1 percent at 78.35 pence, having advanced to as high as 78.60 pence during the session.
The pound had ceded ground after data released on Wednesday showed the UK economy contracting sharply in the second quarter. That served as a grim reminder to investors about the problems the country faced and sparked concerns over a rating that is already on negative watch.
Given the deeper-than-expected recession, pressure on the government to ease its tight fiscal policy and deficit-cutting measures will build and could threaten safe-haven flows into UK gilts. That in turn would hurt the pound, traders said.
Despite the latest gains against the dollar, analysts said sterling would be vulnerable to more weakness as investors start to price in the prospect of further quantitative easing by the Bank or even a cut in the bank rate by 25 basis points.
"We could see sterling drop to $1.5300 in the near term as investors price in chances of a rate cut and further easing by the Bank," said Stuart Frost, head of Absolute Returns and Currency at RWC Partners, a fund management house.
"At lower levels, though, we could see some support from central bank diversification flows."
Many analysts do not expect sterling to stray too far from its recent high against the euro, given fears about whether Spain will need a full bailout or Greece will leave the euro zone.
Also offering a glimmer of hope to the UK is recent data which is showing some signs of a modest expansion. Nevertheless, most investors are likely to sell into a rally in the pound unless data shows a sustained pick-up in economic activity.
"The rapidly deteriorating economic outlook for the UK and the subsequent softening of the official fiscal austerity targets increases the risk of a sovereign rating downgrade in coming months," Valentin Marinov, a currency strategist at Citi, wrote in a note.
"Needless to say, this could make it difficult for sterling to decouple from the beleaguered euro."
(reporting by Anirban Nag)
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