Sterling to gain from reduced QE chances, higher real yields

(Recasts, adds quotes, details, updates prices)
* Sterling steady versus dollar and euro after BoE injects
more stimulus
* BOE action douses talk of more aggressive easing, helps
sterling
* Better risk appetite, higher real yields could drive
sterling higher

By Neal Armstrong
LONDON, Feb 9 (Reuters) - Sterling was supported on
Thursday after the Bank of England said it would inject more
stimulus into the economy as expected, with potential for the
pound to grind higher as real UK yields rise and as the need for
more monetary easing subsides.
The BOE left its key interest rate at a record low of 0.5
percent, and said it would buy another 50 billion pounds of
assets - mostly government bonds - with freshly printed money.
Some had positioned for a 75 billion pound injection, forcing
them to reverse those bearish positions, traders said.
"Sterling has been in a period of ongoing resilience and with
the suggestion that inflation will achieve the goal of below 2
percent without further stimulus, things are again looking
positive for it," said Richard Wiltshire, chief fx trader at ETX
Capital.
In its accompanying statement, the BoE sounded more upbeat,
saying recent surveys painted a more positive picture of the UK.
It was also expecting inflation to undershoot 2 percent in the
medium term without more monetary support..
Sterling rose around half a U.S. cent to $1.5880
from $1.5830 before the BOE announcement, before easing to
$1.5843, up 0.2 percent for the day.
The currency had risen to $1.5929, its strongest since
mid-November, on Wednesday. Near-term resistance is seen at its
200-day moving average of $1.5937, with traders citing offers at
$1.5900 and bids lurking at $1.5760-80.
"Declining inflation is typically good for a currency and so
this will prove for the pound," said Peter Kinsella, currency
analyst at Commerzbank.
"Since the additional BoE asset purchases in November,
sterling has appreciated on a trade-weighted basis," he added,
noting real UK yields would continue to rise as inflation falls,
thereby supporting the pound.
The BoE's trade-weighted sterling index stood at 80.9 at
1600 GMT, compared to around 80.50 at the beginning of November.

Should inflation fall too quickly, however, the need for
more BoE easing measures may resurface, analysts said.
The euro rose 0.1 percent against sterling to
83.88 pence, helped by Greece finally agreeing on reforms needed
to secure a fresh bailout package.
Kinsella said the euro's outperformance, which had helped to
push it briefly above 84 pence, was unlikely to last in the
longer-term, with the UK's austerity measures continuing to
underpin the country's triple-A sovereign rating.
"It is certainly too early to sound the all-clear on the
euro zone crisis and declare that the UK has lost its
quasi-safe-haven status," he added, expecting euro/sterling to
move slowly back towards 80 pence over the rest of the year.
Technical analysts, however, noted the euro flirting with
the 55-day moving average at 83.84 pence and said a daily close
above it for the first time since the end of October would be a
positive signal.

RISK APPETITE
Analysts said that, althugh there was evidence that the UK
growth picture was improving, headwinds remain that could temper
the currency's gains.
Recent purchasing managers' surveys indicated business
activity was improving, but a survey on Tuesday showed retailers
suffered their second-worst January since records began in 1995.
"On balance I would argue that the MPC taking a cautious
approach to QE and the future trajectory of BOE asset purchases
remains far from certain," said Kathleen Brooks, research
director at FOREX.com.
"In the very near term, if sterling/dollar can break above
$1.5900 then tough resistance lies at $1.5940, but the road to
$1.60 actually depends less on QE and more on the overall risk
environment."
Overall risk appetite was holding up well on expectations
that central banks around the world will keep monetary policy
easy to support growth. Expectations that Greece can avoid a
chaotic default and prevent contagion to larger euro zone
economies like Spain and Portugal also helped riskier assets.
Positioning data shows speculators remain short of
sterling, giving scope for fresh gains if the euro's
short-covering rally continues
"So a lot of what will happen to sterling will depend on how
euro/dollar reacts. If euro rises to above $1.35, then sterling
will rise too," said Peter Allwright, head FX trader at fund
manager RWC Partners.

(Additional reporting by Anirban Nag; Editing by Catherine
Evans)