Sterling down vs dollar as market awaits policymakers

Mon Jul 30, 2012 3:42pm BST

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(Updates prices, adds fresh quote)

* Pound down 0.4 pct against dollar after Friday's 5-wk high

* Weak UK data weighs ahead of ECB, BoE meetings

* Markets await further signals on ECB rescue plan

By Michael Szabo

LONDON, July 30 (Reuters) - Sterling lost ground against the dollar on Monday, in line with a broadly weaker euro, as poor UK data coupled with investor unease over whether the European Central Bank will me e t market expectations to support the euro zone weighed.

The euro zone is the UK's biggest trading partner and investors are hoping the ECB will announce bold measures when it meets this week to stem the euro zone debt crisis. If the ECB meets expectations, it could boost risk appetite and sterling, but if it fails to deliver, assets which have a robust relationship with stocks could suffer.

The pound lost 0.4 percent against the dollar to $1.5685, retreating from a five-week high of $1.5768 hit on Friday, which marked the end of a two-day, 1.6 percent rise. Traders cited an option barrier at $1.5800 that could check gains.

Against the euro, though, sterling gained 0.3 percent to 78.12 pence, as Europe's single currency faltered on worries the ECB's meeting on Thursday will turn out to be disappointing.

"It's getting tougher for sterling  It's holding up well against the euro, but things become a lot less certain towards the end of the week with quite a weight of expectations around the ECB," Simon Smith, head of research at FxPro.

"If they do something more aggressive or bolder than before, that has potential to improve the euro at sterling's expense."

Hopes for action have grown since ECB President Mario Draghi said last week the bank would do whatever necessary to save the euro, comments that have ignited speculation the bank could relaunch its bond-buying programme to help Spanish and Italian borrowing costs.

A Reuters poll published on Monday forecast the bank would probably announce on Thursday that it will re-start the programme.

However, Germany has repeated its opposition to such a step. Its Economy Minister warned the ECB about any large-scale government bond purchases and a government spokesman on Monday reiterated Berlin's opposition to any form of mutualisation of euro zone debt.

"The market will look for further headlines to continue the momentum we've seen, but unless we get a continuation of the comments from the end of last week, euro/dollar will probably dip lower and cable (dollar/sterling) will probably follow," said Jennifer Hau, FX strategist at Lloyds TSB.

RESILIENCE UNDER THREAT

The market has been focused primarily on events in the euro zone and the United States, where investors are looking for signs from policymakers of further quantitative easing, but a steady stream of worse-than-expected UK economic data has made the recently resilient pound look increasingly vulnerable.

Bank of England data on Monday showed British mortgage approvals and lending slumped in June, echoing broader economic weakness last month that was blamed in part on extra public holidays and very wet weather.

Consumer lending, such as credit card borrowing, held up relatively well, but house purchase activity fell to its lowest in one and a half years and headline money supply figures showed their biggest annual drop since records began in 1983.

British retail sales also rose less than expected in July, Confederation of British Industry data showed.

"These data will nonetheless add to the sense that the credit environment in the UK has been deteriorating, justifying the additional policy measures on liquidity and bank funding that the government and the Bank of England has embarked on," RBC Capital Markets' Jens Larsen said in a note to clients.

The BoE's Monetary Policy Committee (MPC) will meet on Thursday and although analysts predict it will leave its policy stances unaltered, concerns over a weakening UK economy could push the bank towards more quantitative easing or even a 25 basis point rate cut later this year.

For a story on sterling's outlook click on

"The MPC will ease further, and so will the ECB. But at the risk of sounding overly simplistic, ECB rates are close to zero and have less room to fall," said Societe Generale currency strategist Kit Juckes.

"Even though we think we will see euro/sterling fall to 75 pence over the next year, we can easily imagine it trading well above 80 pence in the next month or so." (Editing by Susan Fenton)

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