Sterling falls to near six-week low on speculation of BoE easing

LONDON Wed Jan 9, 2013 5:21pm GMT

A generic picture of a some British sterling money in coins and bank notes. BANKG REUTERS/Catherine Benson CRB

A generic picture of a some British sterling money in coins and bank notes. BANKG

Credit: Reuters/Catherine Benson CRB

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LONDON (Reuters) - Sterling fell to a near six-week low against the dollar on Wednesday on speculation the Bank of England could ease monetary policy further, with a risk this could happen as early as Thursday.

The pound fell 0.3 percent to $1.5996, its lowest level since late November.

Traders said sterling was vulnerable to further falls after a string of reported stop-loss sell orders were triggered following its break below the January 7 low of $1.6022.

Chart support was expected at around $1.5904, sterling's 200-day moving average. It was last trading at $1.6013.

The BoE is due to announce a decision on Thursday and is widely expected to keep interest rates and its quantitative easing target unchanged.

But traders cited some speculation circulating in the market that there was a risk the BoE could announce more asset purchases.

UK economic data has been weak recently, leading to growing worries the economy may have contracted in the fourth quarter.

Valentin Marinov, head of European G10 FX strategy at Citi, said he did not expect any change in QE on Thursday. However, he said recent data has been weak which could force the BoE to act, perhaps as soon as February, adding to "cyclical headwinds" for sterling.

He also said ebbing fears about the euro zone crisis had dented the demand for sterling as a safe-haven alternative to the euro.

"The recent underperformance of sterling highlights the diminishing need for safe haven, given the worst of the euro zone debt crisis seems to be behind us," Marinov said.

"The quality of safe haven which sterling provides seems to have deteriorated due to the UK economy's weak fundamentals and the growing prospect of sovereign downgrade in the near term."

Traders said options market indicators suggested some in the market expected the pound to trend lower in the coming days.

Against the euro, sterling was flat at 81.46 pence, after three successive sessions of gains, but analysts said the weakening of sterling could see euro/sterling inch higher.

The European Central Bank also meets on Thursday and analysts say sterling moves could be dictated by the euro after the ECB meeting.

Steve Barrow, head of G10 currency research at Standard Bank, said the euro could edge up against sterling if the ECB does not cut rates on Thursday. Only a small number of economists expect a cut.

Investors will be closely watching the ECB's post-meeting news conference for any hints of a future rate cut.

UK ECONOMY CONCERNS

While the pound barely reacted to data showing the UK trade deficit narrowed in November, strategists said it was vulnerable to further evidence of weakness in the UK economy that may add to concerns output contracted in the fourth quarter of last year.

A weak UK retail sales survey on Tuesday added to the UK economy's dire outlook after last week's purchasing managers' data showed activity in the dominant services sector declined by its biggest margin in two years.

Another threat to sterling was a potential downgrade of the UK's coveted triple-A credit rating, analysts said.

(Reporting by Anooja Debnath; editing by Stephen Nisbet)

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