RTRS: Sterling rises vs euro as Spain, Greece worries grow
* Pound hits near 2-week high vs euro, trade-weighed basket
* Also rises vs dollar, but vulnerable to UK QE worries
* UK manufacturing output surprisingly weak in April
By Jessica Mortimer
LONDON, June 12 (Reuters) - Sterling rose to its highest in
nearly two weeks against the euro on Tuesday as investors sought
alternatives to the common currency on concerns about Spain and
worries ahead of this weekend's Greek elections.
Buoyed by its gains against the euro, the pound also rose
against the dollar, recovering some of its recent falls, but
analysts said it remained vulnerable due to the growing risk of
the Bank of England opting for more monetary easing.
Data showed UK manufacturing output posted a surprise 0.7
percent fall during April, raising concerns the economy may have
contracted again in the second quarter.
The euro was down 0.3 percent at 80.295 pence
, its weakest since June 1.
Traders reported selling by a UK clearer that helped push
the euro below chart support at the 21-day moving average around
80.44 pence.
"UK's problems are plenty but they are easier to solve than
others, especially the eurozone. In the very short term, I would
expect euro/sterling to head towards 80 pence," said Morgan
Mcdonnel, head of global FX at RBC Dexia.
Initial optimism after Spain agreed a bailout deal for its
banks quickly switched to worries about its long-term access to
markets, which weighed on the common currency.
Investors were also turning their attention to Greek
elections, where a victory for far-left anti-bailout parties
could push Greece towards a chaotic exit from the euro zone.
MORE QE?
Following a string of recent weak UK data, a growing number
of analysts think the BoE could opt for another bout of asset
purchases under its quantitative easing programme, possibly as
early as next month.
"The UK is much closer to doing more QE than the Federal
Reserve, which could trigger underperformance in cable
(sterling/dollar)," said Chris Turner, head of currency strategy
at ING, though he expected the pound to gain against the euro.
Sterling was up 0.5 percent against the dollar at
$1.5552, coming closer to a high of $1.5601 struck on Thursday
and moving further away from the June 1 low of $1.5269.
The pound also rose to a near two-week high against a basket
of currencies at 83.1, Bank of England data showed.
Morgan Stanley analysts advised selling into any rebounds in
sterling against the dollar, saying they do not rule out further
QE from the Bank of England, possibly next month.
"The UK remains highly levered to a rapidly slowing eurozone
via both trade and banking links. Furthermore, lending rates and
credit spreads within the UK are moving higher despite the low
level of the base rate, essentially tightening monetary
conditions in the UK," they said in a note to clients.
It remains uncertain whether or not the BoE will opt for
further QE. Although the economy is weak, some policymakers have
expressed concern that inflation remains too high.
But BoE policymaker Adam Posen struck a dovish tone on
Monday, saying the central bank should buy assets other than
government bonds in order to boost the UK's ailing economy.
Simon Smith, economist at FXPro, said sterling would be
softer if the BoE opted for further asset purchases under QE.
However, the impact may be limited.
"We might see more QE but the impact on currency markets is
likely to be far more muted than early on in the crisis when it
was seen as a one-way carry trade."
