LONDON (Reuters) - Sterling rose against the U.S. dollar on Monday and jumped against the Canadian dollar after the UK government announced Bank of Canada chief Mark Carney as its surprise choice for the top job at the Bank of England.
Carney is perceived as a monetary policy hawk and a respected central banker overseeing a healthy financial and banking sector in Canada, and both those factors helped push the pound higher. However, some said it was a knee-jerk reaction and sterling strength would be limited given the sluggish UK economy.
The pound rose to $1.6032 (1.0007 pounds) against the dollar after the announcement, from around $1.6003 beforehand. It was last trading at $1.6015, down 0.1 percent on the day, and well below Friday’s three-week peak of $1.6051. Traders reported bids around $1.6000, which may limit any drop and offers at $1.6050.
Sterling rose to C$1.5950 against the Canadian dollar, its highest since November 9, from C$1.5898 beforehand.
“The implications on sterling in the near term are quite limited to the extent that he doesn’t take up his post for more than six months,” said Adam Cole, global head of FX strategy at RBC Capital Markets.
“Given the pace at which expectations on the economy are changing and with the uncertainty it is difficult to draw any strong conclusions in terms of change in policy this far ahead.”
Many in the market had been expecting BoE Deputy Governor Paul Tucker to succeed Governor Mervyn King, who steps down next July, and Carney’s announcement caught many on the wrong-foot.
Analysts said a few investors were interpreting Carney’s appointment as possibly the start of a tighter monetary stance by the BoE, limiting the scope for more quantitative easing, which in turn would support the pound.
Quantitative easing is seen as negative for the currency as it increases its supply.
“I think the markets will interpret this as perhaps ushering in a rather tighter monetary stance from the Bank of England,” said Stephen Lewis, analyst at Monument Securities.
“The Bank of Canada’s policy has been tighter. The economic situations of the two countries are different, but it won’t stop it (the market) jumping.”
Against the euro, the pound fell to a one-month low on expectations that international lenders would soon agree a deal on aid for Greece. Euro zone finance ministers were meeting again on Monday to hammer out a deal to get international lenders to release aid to Greece in time for debt repayments due in mid-December.
Sterling recovered some losses after Chancellor George Osborne announced Carney’s appointment, but it is likely to struggle given expectations that forthcoming UK data could show that consumer demand and the housing sector are still weak.
The euro was up 0.1 percent at 80.98 pence, having hit a one-month high of 81.085 pence struck on Friday.
“The euro will remain supported, just on relief at the prospect of a Greek deal,” said Richard Driver, analyst at Caxton FX. He said he may have to review his previous forecast for the euro to be below 80 pence at the end of the year.
But he did not see the euro going beyond the October peak of 81.65 pence.
The market was awaiting the second estimate of UK third-quarter gross domestic product, due on Tuesday. It is expected to be unrevised from the previous estimate and any downward revision could weigh on the pound.
The first estimate showed the economy unexpectedly grew by 1.0 percent over the three months to September, sparking optimism that the country may be recovering from recession better than previously thought.
“Even if the GDP is only a little below the first estimate sterling will be on the backfoot, especially against the euro,” Caxton’s Driver said.
A Confederation of British Industry survey on Monday showed confidence among service firms at its highest since May 2011, although the overall picture was mixed.
Additional reporting by Jessica Mortimer; Editing by Susan Fenton