Sterling eases against dollar, but outperforms euro

Mon Jul 30, 2012 12:15pm BST

Related Topics

* Pound down 0.3 pct vs dollar after Friday's 5-wk high

* Markets await further signals on ECB rescue plan

* Investors eye Bank of England meeting on Thursday

* Weak data highlights pound'S vulnerability (Updates with economic data, comments)

By Michael Szabo

LONDON, July 30 (Reuters) - Sterling eased against the dollar on Monday, in line with a broadly weaker euro as investors anticipated European Central Bank measures to prop up the faltering euro zone and also looked to Thursday's Bank of England meeting.

The pound slipped by 0.3 percent against the dollar to $1.5696, retreating from a five-week high of $1.5768 hit on Friday, which marked the end of a two-day, 1.6 percent rise.

"Sterling has been looking resilient over the past couple weeks. We saw big moves on Friday but we're seeing a general softening in the risk tone today," Jennifer Hau, FX Strategist at Lloyds TSB.

"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."

Against the euro, though, sterling was higher. The common currency was 0.3 percent lower at 78.15 pence, as Europe's single currency faltered ahead of possible ECB action at its meeting on Thursday.

Last Thursday, ECB President Mario Draghi pledged to do whatever it took to save the euro, while late on Friday Standard & Poor's affirmed the UK's AAA credit rating with a stable outlook, quelling worries after lower-than-expected second quarter GDP data.

Analysts polled last week said Britain had about a one in three chance of losing its AAA sovereign rating.

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.

This has led to resilience in the pound despite weak UK economic data, but analysts said sterling could be vulnerable if a steady stream of poor numbers pushed the Bank of England closer to more quantitative easing or even a 25 basis point rate cut.

Strategists expect the BoE's Monetary Policy Committee (MPC) to leave both policy stances unaltered when it meets on Thursday, though the picture will likely change as the year progresses.

"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."

The BoE published data on Monday showing British mortgage approvals and lending slumped in June, echoing broader economic weakness last month blamed in part on due to 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," said RBC Capital Markets' Jens Larsen in a note to clients. (Editing by John Stonestreet)

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