LONDON Sterling jumped 1 percent against a broadly weaker euro on Thursday after the European Central Bank extended its quantitative easing programme for a longer period than expected, albeit at a slower pace.
The ECB said it would continue buying bonds until at least December - three months longer than the six-month extension most investors had been expecting. And although it would from April reduce the size of its monthly purchases to 60 billion euros, from 80 billion now, that still means that overall, more money would be pumped into the economy than forecast.
The euro initially surged across the board, hitting a one-week high against sterling of 85.72 pence EURGBP=D4 as markets reacted to the scaling back of asset purchases. But it quickly turned around and fell as much as 1 percent on the day to as low as 84.29 pence, before recovering a touch.
"That lengthening of the time period in which there's QE being conducted means - even if you assume a best case scenario of a fairly abrupt taper in 2018 - you're still talking about the middle of 2018 as being the very earliest that we’d get an end of QE in Europe," said MUFG strategist Derek Halpenny.
Against a stronger dollar, sterling was down half a percent at $1.2566 GBP=D4. It was up, though, half a percent on a trade-weighted basis, recovering from its worst daily performance in two months after weak industrial data and a parliamentary vote to stick to the British prime minister's Brexit timetable weighed on the currency.
British lawmakers on Wednesday backed Theresa May's plans to trigger the start of formal talks with other European Union members on leaving the bloc by the end of March, after she headed off a rebellion in her party over a lack of insight into the government's strategy to leave the EU.
May still faces obstacles - the High Court ruled last month that the government needs parliament's assent to invoke Article 50, the formal mechanism for starting Brexit talks. The government is challenging that ruling in the Supreme Court.
But the vote in favour of May's timetable disappointed those investors who had been hoping that Brexit would be delayed.
"Sterling was hit quite hard yesterday by a solidifying of expectations that we will get a (Brexit) vote by the end of March," said RBC Capital Markets currency strategist Adam Cole.
The pound was also hit on Wednesday by data showing falls in sterling since the EU referendum had failed to boost Britain's manufacturers in October as industrial output suffered its biggest monthly drop since 2012.
(Editing by Robin Pomeroy)