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Sterling skids to 8-week low vs euro on news of ECB rate hike discussion
March 10, 2017 / 4:58 PM / in 5 months

Sterling skids to 8-week low vs euro on news of ECB rate hike discussion

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Jemima Kelly

LONDON, March 10 (Reuters) - Sterling skidded to an eight-week low against the euro on Friday, as the single currency rallied broadly on news the European Central Bank had discussed the possibility of raising interest rates before ending its quantitative easing programme.

Sources told Reuters that some ECB policymakers had raised the possibility of a rate hike before the end of QE, though the discussion was isolated and did not enjoy any broad support.

The pound lost almost 1 percent against the euro to hit 87.79 pence after the news, its weakest since Feb. 17, with the euro already boosted by comments on Thursday from ECB chief Mario Draghi that investors saw as somewhat hawkish.

That left sterling on track for its weakest fortnightly performance against the euro in five months. The pound has also been hurt by worries that Britain's economy is heading for a slowdown on the back of sluggish consumer spending, as well as talk of a second referendum on Scottish independence.

Data showing British factory output had its strongest growth in nearly seven years in late 2016 and early 2017, with exports also growing quickly, had only a marginal - and short-lived - positive effect on sterling.

While the data followed other strong manufacturing numbers earlier this week, the sector accounts for only around 10 percent of Britain's economy.

Other numbers continue to suggest consumers, whose spending helped cushion the shock vote for Brexit last June, are turning more cautious. Separate data on Friday showed Britain's shops endured their worst fall in February sales since 2009.

"We're now seeing the consequences of the Brexit vote feeding through into the economy, whereas immediately after the vote the data was surprisingly strong," said Alex Edwards, head of dealing at money transfer company OFX in London.

"But I think a lot of the negatives around Brexit are quite heavily priced in already, and ... sterling is going to be supported around $1.20 - I can't see it falling much below that," he added.

Sterling inched down 0.1 percent to $1.2154, having earlier hit an eight-week low of $1.2133. It has lost around 2.5 percent against the greenback in the past two weeks, with its falls exacerbated by a simultaneous dollar rally on the view the U.S. Federal Reserve will hike interest rates next week.

"If we've had this kind of move, and we know that sterling relative to fair value is one of the cheapest around - if not the cheapest - I just think there’s reluctance to add to shorts," said UBS Wealth Management currency strategist Geoffrey Yu, in London. (Editing by Ed Osmond)

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