Sterling climbs after rate decision, lags euro
LONDON (Reuters) - Sterling rose against the dollar on Thursday after the Bank of England kept monetary policy unchanged as expected, but fell against the euro after the ECB gave no hint of future interest rate cuts in the euro zone.
The pound rose to $1.6096 (1.0004 pounds) from around $1.6056 before The Bank decision with option expiries at $1.6100 likely to cap the currency's near term gains. It losses against the euro were also likely to weigh, traders said.
The BoE's Monetary Policy Committee (MPC) said its main interest rate would stay at a record low 0.5 percent and it would not buy any government bonds on top of the 375 billion pounds purchased so far.
None of the 64 economists polled by Reuters had expected any policy change, but there was speculation among a few traders that the Bank could still consider easing policy. That dragged the pound to a near six-week low of $1.5992 on Wednesday.
"This unchanged decision by the Bank was very much expected," said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Capital. "We expect sterling's gains to be capped at $1.63 given the weakness in the UK economy."
While consumer spending and output in the UK continues to stagnate, implying a growing amount of spare capacity in the economy and keeping expectations of further monetary policy easing in coming months, inflation remains above target.
Stubborn inflationary pressures would make the BoE's task of easing monetary policy tougher, offering some support to the British pound.
Tom Vosa, head of market economics at National Australia Bank, said that while declining output would bolster expectations of further QE, a decision on increasing the asset purchase programme was likely to be made after Bank of Canada chief Mark Carney takes over as governor of the Bank on July 1.
"We suspect that any decision to increase QE could be postponed until August, but a move from May onwards is certainly possible should survey data show a weak second quarter," he said.
Economists expect the UK to struggle given its biggest trading partner the euro zone is likely to go through a recession, at least in the first half of the year.
Against the euro, sterling extended losses into a fifth straight day after European Central Bank President Mario Draghi offered no clues on when the bank might cut rates again. The ECB had earlier kept rates on hold at an historic low 0.75 percent.
No move had been expected but some investors had positioned for the ECB to lay the groundwork for a future rate cut, given the struggling euro zone economy.
The euro was up 0.6 percent against the pound at 81.95 pence, having risen to a near two-week high of 82.055 pence after Draghi said the decision to keep rates unchanged was unanimous. That implied that there was no request for a rate cut from other members of the governing council, he added.
Draghi said the real and effective exchange rates for the euro were holding close to long-term averages, displaying little desire to drive the currency lower to boost euro zone exports.
"Draghi's comments that the rate decision was unanimous certainly caught a few who were expecting the ECB to edge closer to a rate cut off-guard, leading to a sharply higher euro," said Richard Driver, currency strategist at Caxton FX.
"The 82 pence level looks very vulnerable and a test of recent highs of 82.25 pence cannot be ruled out if UK data prints on the weaker side in coming days."
On Friday, industrial output for November will be released and is likely to show a 0.8 percent rise from a month ago, but is likely to fall 1.9 percent from a year ago.
(Editing by Catherine Evans)
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