Sterling falls after UK data, hits 9-month low versus euro

LONDON Fri Jan 11, 2013 4:13pm GMT

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LONDON (Reuters) - Sterling fell to a nine-month low against a buoyant euro and dropped against the dollar on Friday after weak UK industrial output added to data showing the UK economy probably shrank in the fourth quarter.

The euro was up 0.9 percent on the day at 82.73 pence. It rose from around 82.18 pence before the data was released, extending gains into a sixth straight day. It was the euro's highest level since early-April.

The pound fell 0.4 percent on the day against the dollar, dropping to a session low of $1.6089 (9975 pence) before recovering slightly. Its losses across the board saw sterling trade-weighted index fall to a six-month low of 83.0, data from the Bank of England showed.

"Sterling weakness has been shown from weak numbers this morning," said Daragh Maher, currency strategist at HSBC, adding that as the euro had broken past the 82.25 pence high it could target February 2012 highs of 85 pence. He added sterling could fall to $1.60 and target the 200-day moving average at $1.59.

Consumer spending and output in the UK have stagnated, implying a growing amount of spare capacity in the economy. The latest industrial data underpins that trend and will hold some expectations that the UK could face another contraction and will need more monetary stimulus.

In contrast, the European Central Bank President Mario Draghi offered no clues on when the bank might cut rates again after the Governing Council decided to keep rates on hold at an historic low 0.75 percent. That cooled expectations of a rate cut and pushed the euro higher across the board.

"Euro/sterling's move is more of a euro story right now," said Geoffrey Yu, currency strategist at UBS, adding fund managers were unwinding euro short positions and that was contributing to its rise against the pound, which could see it gain to 84 pence in the near term.

WEAKER UK NUMBERS

The Bank kept its main interest rate at a record low 0.5 percent on Thursday and said 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. That had dragged the pound to a near six-week low of $1.5992 on Wednesday before buying by Middle East investors pushed it higher.

Traders expect the pound to trade in a $1.58 to $1.63 range in coming months. Gains are likely to be capped as the UK is expected to struggle given its biggest trading partner the euro zone could go through a recession, at least in the first half of the year.

Data from the National Institute of Economic and Social Research on Friday showed the UK economy probably shrank by 0.3 percent in the fourth quarter.

Some analysts say the pound could ease if the UK loses its prized triple-A rating if growth continues to struggle and the government misses its debt reduction targets.

Analysts said sterling could also suffer given safe-haven inflows from investors seeking to flee the euro zone debt crisis were waning. Last year, investors seeking safety from a possible euro zone break up had piled into top-rated UK gilts.

"We think there is a risk these inflows reverse, on the back of UK downgrade risks and ongoing exceptionally poor macro performance," said George Saravelos, currency strategist at Deutsche Bank, recommending investors to buy euro versus sterling and sell sterling against the dollar.

Investors will be looking to CPI inflation data due next week. If inflation remains stubborn, it could make it a tad tougher for the Bank to ease monetary policy, lending some support to the pound.

(Additional reporting by Anirban Nag, Editing by Ron Askew)

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