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Sterling rallies after central bank holds fire on easing
March 7, 2013 / 1:21 PM / in 5 years

Sterling rallies after central bank holds fire on easing

* Sterling climbs broadly after BoE keeps policy unchanged

* Gains expected to be temporary, risk of more QE remains

* Euro may retreat if ECB hints at looser policy in future

By Nia Williams

LONDON, March 7 (Reuters) - Sterling rose against the dollar and euro on Thursday after the Bank of England decided not to restart its asset purchase programme, wrongfooting investors who had positioned for more monetary stimulus.

The pound’s gains are expected to be short-lived, however. Many strategists said the central bank’s decision to hold fire now will simply reinforce speculation that more money will be injected into the economy next month instead.

Sterling jumped to a session high of $1.5075 against the dollar, from $1.4991 before the BoE announcement. It was last up 0.2 percent on the day at $1.5053, holding above a 2-1/2 year low of $1.4965 hit during Asian trade.

The euro dropped to a session low of 86.33 pence after the BoE announcement, from 86.90 pence beforehand.

Policymakers voted to keep the bank’s quantitative easing programme at 375 billion pounds and rates on hold at 0.5 percent. The decision was in line with economists’ consensus forecasts, although many market players had been braced for looser policy.

“It seemed like traders had become more dovish than economists so were pricing for something more,” said Adam Myers, senior FX strategist at Credit Agricole.

“We’re selling into this rally and don’t think sterling strength will last more than 24 hours. The economic outlook and policy outlook both point to more asset purchasing in the months to come.”

Asset purchasing involves printing money to buy bonds and tends to weigh on a currency by boosting its supply.

The euro was steady against the pound after the European Central Bank kept rates on hold at 0.75 percent, as widely expected. It could come under selling pressure if ECB President Mario Draghi uses his 1330 GMT news conference to hint at loosening monetary policy in coming months.

BETS ON LOOSER POLICY

Market players said demand for sterling would be curbed by expectations incoming BoE governor Mark Carney could introduce more radical easing measures when he take the helm in July.

The pound fell earlier in the session after a media report said finance minister George Osborne will change the inflation remit for Carney, and flag looser monetary policy in his March budget statement.

“Every time Mark Carney’s name comes up the pound gets battered,” said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.

“Anyone who seems more dovish than (current BoE governor) Mervyn King is not good for the pound in the short term. It remains to be seen whether it will be good for the pound in the longer term.”

Sterling has been one of the worst performing major currencies in 2013, falling nearly 8 percent against the dollar.

Better-than-expected data from the dominant British services sector this week failed to completely dispel concerns that the fragile economy could slip back into another recession.

The loss of Britain’s prized triple-A credit rating after a Moody’s downgrade has also unnerved investors and called into question the government’s strict austerity measures.

Morgan Stanley strategists said the policy debate in the UK was likely to heat up ahead of the budget on March 20 and curb appetite to buy the pound. They said any rebounds in sterling should be viewed as selling opportunities, targeting a decline towards the $1.46/1.45.

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