RTRS: Sterling cuts gains versus dollar as BoE in focus
(Reuters) - Sterling's gains against the dollar ran out of steam on Wednesday as investors looked beyond Barack Obama's victory in the U.S. presidential election to that country's fiscal problems.
Nerves ahead of a Bank of England interest rate decision on Thursday also checked gains in the British pound.
Sterling was flat on the day at $1.5995, easing towards its two-week low of $1.5957 struck on Monday, and off a session high of $1.6043. Near-term support is seen at October 23 low of $1.5914.
"We saw the dollar sell off this morning after the election result, but it has since gained ground on some profit-taking," said Neil Mellor, currency strategist at BNY Mellon, adding he was positive on the dollar.
The dollar had been rising in the run-up to Tuesday's election amid some expectations that a victory for Republican Mitt Romney would translate into early monetary tightening.
Obama's re-election was seen as the status quo and a signal that the Federal Reserve's easy monetary policy is likely to stay. That weighed on the dollar and gave a boost to commodity currencies like the Australian and Canadian dollars.
But the dollar's weakness is likely to be temporary, especially with a looming 'fiscal cliff' of tax hikes and spending cuts due to take effect in January.
The Democrats retained a majority in the Senate but the Republicans held the House of Representatives, which could lead to tough negotiations over the fiscal problems and potentially prompt safe-haven flows into the dollar.
The euro fell after weak German industrial output data and was headed towards its one-month low of 79.84 pence hit on Tuesday. It suffered further losses after lowered euro zone growth forecasts from the EU Commission, trading down 0.25 percent to 79.86 pence.
Investors are also wary of the euro before a vote in the Greek parliament on further austerity measures.
If the vote fails in parliament, international lenders will withhold an aid tranche for the struggling economy, a factor that will weigh on the single currency.
TO EASE OR NOT
Market players are betting there will be no more easing from the Bank of England's monetary policy committee (MPC) on Thursday, a factor that has helped the pound in recent weeks. Expectations of more quantitative easing (QE) usually weigh on sterling as asset purchases increases the currency's supply.
Economists expect rates to be held and asset purchases to pause at 375 billion pounds, expecting the central bank to hold fire on more easing until early next year.
The European Central Bank also meets on Thursday and while no rate cuts are expected, growing evidence that the euro zone is in recession is likely to boost expectations of more easing in the coming months.
"We expect little new from the ECB, with a rate cut likely next month, but the BoE's decision on whether to expand quantitative easing (QE) is on a knife-edge," ING said in a note.
"We narrowly expect the Bank to hold off from further easing, which can assist EUR/GBP toward our year-end 0.78 target."
Meanwhile, the Australian dollar hit a fresh 7-week high against sterling of 65.35 pence, as the Reserve Bank of Australia held rates at 3.25 percent on Tuesday, boosting it against the pound.
