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Sterling flat, risks selling as UK economy struggles
July 4, 2011 / 4:22 PM / in 6 years

Sterling flat, risks selling as UK economy struggles

 (Refiles with extended Kinsella quote, par 19)	
 * Sterling little changed, hovers near 15-month low vs euro
 * Pound could suffer more vs euro on rates; BoE, ECB in
 * Investors await UK services sector PMI
 By Nia Williams and Naomi Tajitsu	
 LONDON, July 4 (Reuters) - Sterling erased gains versus the
dollar on Monday, as the view the UK economy will continue to
struggle knocked the pound from a session high hit after waning
concerns about a Greek debt default had prompted short-covering
in higher-risk currencies.	
 The pound hovered near a 15-month low hit against the euro
last week as investors awaited Thursday's central bank meetings
in the UK and the euro zone. A further monetary tightening by
the European Central Bank is expected while UK interest rates
are seen chained near record lows.  	
 Sterling has suffered against a widely recovering euro after
the passage of Greek austerity measures last week helped the
debt-laden country to avoid a default for now, resulting in a
hefty bounce in the single currency.	
 At the same time, the euro's recovery versus the dollar has
dragged the pound higher versus the U.S. currency.	
 Analysts said another flare-up in Greece's debt problems
could boost the pound against the euro, while arguing that any
gains would be unsustainable so long as euro zone rates continue
to rise while UK rates are stuck at 0.5 percent.	
 "When you have the interest rate differentials between the
euro and sterling becoming quite wide, and widening even
further, that's going to put pressure on sterling to go lower,"
said Peter Kinsella, currency strategist at Commerzbank.	
  He acknowledged there was a possibility that the euro may
climb into the 91-94 pence region in the coming months. 	
 The euro was flat on the day at 90.30 pence.	
 Earlier on Monday, it struck a session high of 90.66 pence,
but the single currency lost its upward momentum after ratings
agency S&P warned a debt rollover plan that is being considered
for Greece may still constitute a selective default.	
 It remains close to a 15-month high of 90.84 pence hit on
Friday, however, and positioning in the single currency suggests
a bias towards the upside. 	
 Thomson Reuters Matching data shows EUR/GBP's rally last
week coincided with the highest trading volume seen in the pair
since June 2010, indicating that the euro tends to gain as
volumes increase.	
 Sterling was flat on the day at $1.6065 , retreating
from a session high of $1.140.	
 There was little reaction to UK PMI construction data which
showed a modest slowdown in growth at 53.6, compared to
forecasts of 53.7 and a previous reading of 54 in May.
 "We had the construction PMI this morning which maybe was
not as bad as some people were thinking but I cannot get excited
about cable breaking significantly higher. Overall data has not
been strong," said Paul Mackel, director of currency strategy at
HSBC Markets.	
 Sterling was at 1.3660 francs , up more than 3
percent from a record low of around 1.3256 francs hit last week.
    Analysts said sterling benefited from investors closing
out long positions on the safe-haven Swiss franc as the
prospects for a Greek default appeared to have receded.	
 Investors awaited UK services PMI data on Tuesday, given
that services make up roughly 70 percent of the UK economy and a
slowdown could significantly increase the chances of the Bank of
England opting for more monetary stimulus.	
 A Reuters poll of analyst puts the consensus June services
PMI forecast at 53.5, down from 53.8 in May. 	
 A recent run of UK data suggests the economy is struggling
to recover from recession, and  Kinsella at Commerzbank said
more weak readings could hammer the pound.	
 "We don't know how the MPC will react if data weaken further
and that means a potential for further quantitative easing,
although that is not our base case scenario," he said.	
 He added that such a possibility had yet to be priced into
the market, and that as a result, any indication that more
stimulus may be possible would knock the pound lower versus a
host of currencies.	
 (Reporting by Nia Williams; Editing by Catherine Evans)	

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