RTRS:Sterling gains on IMF optimism, but lags euro
By Anirban Nag
LONDON, Jan 18 (Reuters) - Sterling rose against the dollar, but lagged the euro on Wednesday as risk sentiment received a boost on a media report that the International Monetary Fund was proposing to boost its lending resources by one trillion dollars.
Bloomberg News reported that the IMF was planning such an expansion to safeguard the global economy against the worsening euro zone debt crisis. The report saw the euro jump against the dollar, while European stocks rose and safe-haven government bonds were sold off.
Reuters reported on Tuesday that the IMF board discussed ways to boost the fund's resources and urged action to contain the debt crisis.
"The euro, sterling all moved higher on the report that the IMF is planning to increase its lending resources," said a spot trader in London.
Against the dollar, sterling rose 0.3 percent to $1.5375, staying well above Friday's trough of $1.5234, its lowest level since July 2010. It extended gains into a third straight session on early buying by Middle East investors. Traders cited stop-losses above Friday's high of $1.5410 with option expiries at $1.5400 also likely to sway trade.
It barely reacted to data that showed the number of Britons seeking unemployment benefits rise much less than expected in December. Still, the unemployment rate inched up to 8.4 percent, highlighting how soft the labour market was in Britain in the face of rising government spending cuts and falling private sector investments..
As a result, the euro extended gains against the pound and was last up 0.4 percent on the day at 83.41 pence, having hit a high for the day of 83.475 pence. Traders reported stops above 83.50.
"The euro has seen a couple of good sessions, but with uncertainty over a Greek default still looming large, we expect sterling to gain against the euro," said Richard Driver, currency strategist at Caxton.
Hopes that Greece and its creditors could avoid a costly default have supported sentiment towards the common currency as talks between the two sides were set to resume. Still, the euro's outlook was at best fragile, with a senior official at Fitch warning that a two-notch downgrade of Italy was an option.
STRUGGLING UK ECONOMY
Analysts said sluggish UK data is likely to see more investors initiate fresh bearish positions against sterling at every rally.
On Tuesday data showed British inflation fell sharply in December, with the annual CPI rate dropping to 4.2 percent from 4.8 percent in November, supporting the Bank of England's view that consumer price inflation may have peaked.
The weaker reading added to expectations the BoE will increase asset purchases under its quantitative easing programme next month. Clear evidence of falling prices is a precondition for some BoE policymakers to back QE expansion.
Morgan Stanley strategists said in a note that they had used sterling's rebound on Tuesday to initiate fresh bearish bets. They have entered into a short position at $1.5390 with a target of $1.4800 with stops at $1.5490.
But sterling's is likely to stay supported against the euro with many analysts sceptical about how much further the euro could gain given rising concerns about the euro zone debt crisis.
"We anticipate a deterioration in sentiment with respect to the European monetary union this quarter and continue to view rallies in euro/sterling as selling opportunity ahead of a push to the 82 pence level on a three-month view," said Jane Foley, senior currency strategist at Rabobank.
