RTRS: Sterling gains versus euro, deal on Greek aid eyed
(Reuters) - Sterling edged higher against the euro on Tuesday on safe-haven bids after news of France's credit rating downgrade, clouded the outlook for the euro zone and weighed on its currency.
Ratings firm Moody's cut Europe's second largest economy's prized triple-A credit rating by a notch late on Monday, citing a faltering economy and an uncertain fiscal outlook and warned further downgrades were possible.
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The euro fell 0.2 percent against sterling to 80.40 pence, with resistance expected around last week's high of 80.65 pence and at the 200-day moving average of 80.77 pence.
The pound rose 0.1 percent against the dollar to $1.5930, moving away from a two-month low of $1.5828 hit last week. Support for sterling was cited at 1.5884, its 100-day moving average.
"Ratings in the core are back under pressure with France in the spotlight. That has traditionally provided sterling with some support as it is seen as a safe-haven from Europe," said Ian Stannard, head of European FX strategy at Morgan Stanley.
Strategists said losses in the euro on Tuesday were more a knee-jerk reaction to France's downgrade, which had already been priced in after Standard & Poor's cut its rating in January.
"Given that move was widely expected as far as France was concerned, it shouldn't have too much of an impact except some support for sterling in the very near term. Bigger risk events are on the horizon for sterling so any rebounds would be temporary," Stannard added.
Stannard said he remains negative on sterling in the medium term and this bounce could see it touch $1.5950-$1.5960 area before it comes back under pressure. He expects euro/sterling to head back to 79.60 pence area over the next few days.
Sterling moves against the euro were more likely to be dictated by developments on Greece. Euro finance ministers were due to meet later on Tuesday and were expected to give tentative approval for the next tranche of loans for Greece to be disbursed.
Markets remained cautiously optimistic that a deal on Greece will be reached on Tuesday. This could see euro/sterling rise.
BOE MINUTES
Domestically in the UK, focus would shift to the release on Wednesday of minutes of the Bank of England's November meeting for more clues on quantitative easing and public finance data.
"If there is a sign of (Monetary Policy Committee) members moving away from quantitative easing or don't think it is that effective we could see upside in sterling, it could probably recover some of last week's weakness. Hawkish minutes will limit sterling's downside," said Kathleen Brooks, research director at FOREX.com.
Analysts will also look for clues to how policymakers view the government's recent decision to transfer the interest proceeds of QE from the BoE to the UK treasury, a move Governor Mervyn King equated to modest monetary loosening.
Some strategists said concerns about UK growth were likely to limit any potential gains for sterling, even if the minutes prompt investors to pare back bets on further easing which would provide sterling some support.
QE involves printing money to buy bonds and tends to be seen as negative for a currency by boosting supply.
The UK emerged from recession in the third quarter but recent data has been weak and public sector borrowing figures due for release on Wednesday should give an indication of whether the government will come close to meeting deficit reduction goals.
"The public finance data tomorrow will be important to see exactly how far the government's finances are running behind target. There is a risk that could put sterling back under pressure." Morgan Stanley's Stannard said.
