September 21, 2010 / 3:38 PM / 9 years ago

Sterling slides vs euro after strong debt auctions

* Euro hits 2-month high of 84.70 pence EURGBP=D4

* Irish, Greek government bond auctions buoy euro

* UK public borrowing hits record high for August

By Tamawa Desai

LONDON, Sept 21 (Reuters) - Sterling hit a two-month low against the euro on Tuesday as the single currency rose on robust investor demand for Irish and Greek government paper, which eased concerns about euro zone peripheral sovereign debt.

While staying under selling pressure against a broadly strong euro, the pound managed to claw its way back from earlier losses versus the dollar as it tracked the single European currency’s move higher against the greenback. The euro extended gains after Ireland sold 1.5 billion euros in an auction of 2014 and 2018 bonds, at the top of its target range, with yields well below those seen for the bonds in the secondary market. [ID:nDUB003244]

Greece sold 390 million euros of 3-month T-bills with foreign investors buying about 72 percent of the paper, the country’s debt agency said. [ID:nATH005694]

“The auction results are providing the euro with broader support,” said Ian Stannard, senior currency strategist at BNP Paribas. “Euro/sterling has been one of the star performers.”

The euro rose to a two-month high of 84.70 pence, up 0.7 percent on the day EURGBP=D4 after stops were triggered initially above 84.16 pence and then 84.50 pence, traders said.

By 1505 GMT, it traded at 84.40 pence, having closed just above the psychologically key 84.00 pence on Monday. Technical support also came in at 83.84 pence, the 23.6 Fibonacci retracement of the euro’s October 2009-June 2010 move down.

The pound sagged briefly after data showed UK public sector net borrowing at an August record high as interest payments on gilts shot up because of higher inflation. [ID:nUKLLKE64R]

Sterling hit a low of $1.5503 against the dollar in early London trade, before pulling back to $1.5550 GBP=D4, little changed on the day. Demand from Asian accounts helped support the pound, traders said.

FED AWAITED

Investors speculated the U.S. Federal Reserve may flag the need for future monetary easing at a policy meeting later on Tuesday, and expected post-meeting moves in the dollar to drive sterling/dollar and euro/sterling.

Some traders said the dollar would climb if the U.S. central bank’s outlook for the economy and rates is not as downbeat as investors expect, and this may put both the UK and European currencies under selling pressure.

Still, one sterling trader in London said that given euro/sterling’s uptrend in past week, a slide in the euro under 84.00 pence would offer a good buying opportunity.

“It feels like (euro/sterling) wants to go higher and I don’t think there are many short positions around to squeeze out, so I think if we do see sub-84.00 it’s a chance to establish longs,” he said. Technical analysts expected the euro to appreciate further, but an immediate obstacle lay at 84.80 pence, the 38.2 percent retracement of the euro’s slide in February-June.

In early London trade, the UK currency was hammered versus the Swiss franc on selling by speculative accounts and flows linked to merger and acquisition-related speculation.

It fell as low as 1.5536 francs, before pulling back to 1.5596 GBPCHF=, little changed on the day.

Broad weakness pushed trade-weighted sterling to a two-month low of 80.8 =GBP.

Additional reporting by Naomi Tajitsu

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