LONDON (Reuters) - Sterling edged lower for a third straight day against a buoyant U.S. dollar on Wednesday as perceived riskier currencies were under pressure on growing concerns about Spain’s delay in requesting a bailout.
But the UK currency’s losses were likely to be checked as it outperformed the euro. The single currency has retreated from a three-month high struck on September 14 to trade near its lowest levels in three weeks against the pound. The euro was lower on the day at 79.50 pence, not far from its trough of 79.36 pence.
The pound is likely to be helped by talk of farm subsidy payments due later in the week, which the European Union makes to the UK once a year. The subsidy could see around three billion euros of flows into the UK, market players said.
Against the dollar, sterling was 0.1 percent lower at $1.6165, retreating from a 13-month high of $1.6310 hit last week with bids cited by traders at $1.6150. Offers are layered above $1.6200/10, traders said. The pound’s recent gains have pushed trade-weighted sterling index trade to a two-month high of 84.70 earlier this week.
“A risk-off mood is settling over the markets and that is impacting sterling/dollar,” said John Hardy, FX strategist at Saxo Bank.
“But the interesting move is in euro/sterling and it looks like the drop below 80 pence could see it ease back to 77.50 pence in the near term as progress by Spain towards a bailout remains in doubt.”
The European Central Bank’s plan to ease the region’s debt crisis by buying indebted countries’ bonds has supported the euro in recent weeks. But the plan cannot be implemented until a country requests a bailout.
Spain’s Prime Minister Mariano Rajoy said in an interview he was ready to seek a new rescue package for his troubled country but only if its debt financing costs remain too high for too long.
Spanish borrowing costs for 10 years rose to 6 percent on Wednesday. And there was little respite for the euro zone’s fourth-largest economy as the Bank of Spain warned that gross domestic product kept falling at a “significant rate” in the third quarter of 2012.
Traders said the longer Spain takes to request a bailout, the more investors will turn jittery about riskier assets and currencies, including the pound. The euro zone is the UK’s main trading partner and the Bank of England has flagged risks to growth due to the debt crisis and austerity in much of Europe.
A survey on retail sales by the Confederation of British Industry showed some improvement in September. The CBI distributive trades survey’s sales balance rose to +6 in September from -3. Analysts had forecast a rise to +5. The expected sales balance for October jumped to +15.
But there was little impact on sterling from this with overall consumer spending in the UK still sluggish. The UK economy has shrunk for three quarters, and while recent data has suggested the economy may be rebounding, expectations of more easing by the BoE later in the year remain in place.
Further quantitative easing would be negative for sterling as it would increase supply of the currency.
“Tomorrow’s UK GDP (final figures for second quarter) will be the focus and unless there is a significant upward revision, we do not expect sterling to progress much,” said Richard Driver, currency strategist at Caxton FX.
Editing by Ron Askew