Sterling off 1-mth high vs euro as weaker PMI weighs

Mon Nov 5, 2012 5:07pm IST

* Single currency pares losses versus sterling

* Weaker-than-expected UK PMI boosts BoE doves

* Most investors don't expect QE at Thursday's BoE meeting

By Philip Baillie

LONDON Nov 5, (Reuters) - Sterling eased from a one-month high against the euro on Monday after the UK services sector expanded at a lower-than-expected pace and wrongfooted some investors who expected a robust reading.

The October UK purchasing managers' index survey showed expansion in the services sector, but came in lower than expected at 50.6 against analysts' forecasts of 52, for its lowest reading in almost two years.

Monday's data raises the chances that the economy could shrink again between October and December after surprisingly strong expansion in the third quarter.

Earlier the single currency had fallen broadly on fresh uncertainty about whether Greece can pass crucial labour reforms for it to receive more financial aid.

The euro was flat on the day at 80.04 pence, recovering from a low of 79.86 pence, its lowest since Oct 2. Near term resistance is at its 55-day moving average of 80.12 pence while offers are cited above 80.30/40 all of which could make the single currency struggle to gain further.

Against the buoyant dollar, the pound fell 0.3 percent to $1.5971, with traders citing UK exporters' bids at$1.5980 and support at $1.5935--the low struck on Oct 24.

"The services data has knocked the wind out of the sails of sterling a little, but it is likely the upside is going to continue," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

He expected the euro's gains against sterling to be capped around 80.25 pence in the short term as underlying risks in Europe are more pronounced.

A stronger services indicator was expected to add to a more optimistic picture of the UK economy, with third-quarter growth coming in higher than expected and healthier construction data last week, all helping to bolster the pound.

DOVISH CASE BOOSTED

Slightly weaker-than-expected services data, however, could strengthen the case for more asset purchases known as quantitative easing (QE) from the Bank of England. More QE usually hurts a currency as it increases the supply.

But CIBC's Stretch said the PMI data was unlikely to alter the course of QE, although could slightly boost the case for more easing from some members of the Bank of England's monetary policy committee (MPC), which meets on Thursday.

Some analysts expect the BoE to slightly increase its stimulus programme. That uncertainty is likely to check sharp gains in the pound before the meeting, traders said.

"From the BoE we expect a 25 billion pound boost to the QE securities purchasing limit," Credit Agricole told clients in a morning note.

Most analysts, however, expect the MPC to hold rates and keep its asset purchase programme unchanged until early 2013.

"Following comments of dampened expectations of quantitative easing from members we expect rates to be held," said Paul Robinson, head of European FX research at Barclays Capital.

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