ET:Sterling falls against dollar, risks to UK growth weigh
LONDON: Sterling was heading towards six-week lows against the dollar on Thursday as investors sold the pound on concerns that a deepening recession in the euro zone would be a drag on the British economy.
The Bank of England (BoE) raised its growth forecasts on Wednesday, but Governor Mervyn King said there were challenges ahead given the problems in the euro zone. Separate data showed the euro zone economy had shrunk for a sixth straight quarter.
With investors focusing on relative growth prospects, many were buying the dollar on signs of a sustained U.S. economic recovery, which could see the Federal Reserve slow its asset purchase programme.
Sterling was down 0.2 percent on the day at $1.5202, not far from a six-week low of $1.5173 struck on Wednesday. Traders cited option expiries at $1.5200 that could keep the currency pinned around that level.
Against the euro, sterling was flat with the single currency trading at 84.55 pence. But with financial markets speculating that the European Central Bank could cut interest rates again in coming months to support the economy, and the BoE seen holding policy steady in the next couple of months, traders said the euro was likely to head towards recent lows of 83.98 pence.
Analysts said the BoE's Quarterly Inflation Report, released on Wednesday, backed the market view that no significant policy change was likely before incoming chief Mark Carney takes over in July. The minutes of this month's Monetary Policy Committee meeting, due out next week, are expected to bolster that view.
"In the case of euro/sterling, it is worth highlighting that the relative rate outlook still seems to point at substantial downside," said Valentin Marinov, strategist at Citi. "On sterling/dollar, we suspect investors could use moves higher in cable to establish fresh shorts."
Analysts said that weakness in the euro zone, Britain's biggest trading partner, could hurt the UK's economic recovery and push Carney to ease policy aggressively later this year. That made the dollar more attractive.
"We think rallies in sterling/dollar will fade," said Kathleen Brooks, research director at FOREX.com.
"We think the medium-term outlook is mildly bearish after the break below $1.5350 late last week, since it ended the medium-term uptrend that started back in March. The $1.50 level is a key medium-term support zone."
