Sterling at five-week high versus euro after BoE pause

Thu Nov 8, 2012 9:40pm IST

* BoE holds interest rates, QE total unchanged

* Pound rises after rate decision on prior risk of more QE

* But boost seen short-lived, especially against dollar

* Outlook for UK economy still bleak given weak euro zone

By Philip Baillie

LONDON, Nov 8, (Reuters) - Sterling hit a five-week high against the euro on Thursday as the Bank of England left interest rates and the size of its bond-buying programme unchanged.

The decision had been broadly expected after recent stronger-than-expected UK third quarter growth figures but traders said the pound rose because some investors had positioned for the risk of the BoE opting for more stimulus.

"There was a little bit of expectation that they were going to opt for more QE (quantitative easing) because of weaker October data," said Kathleen Brooks, research director at Forex.com, attributing the rise of the pound to the BoE's decision to hold fire.

"Meeting minutes are going to be very important as is the Inflation Report ... it seems sterling/dollar is probably going to remain rangebound until the release of those reports."

The euro fell 0.3 percent to 79.605 pence, its lowest since Oct. 1. Further weakness could take the euro towards its late September low of 79.23 pence.

Against the dollar, the pound was flat at around $1.5980 , recovering from an earlier two-week low of $1.5930. Traders reported offers above $1.60 which may limit any gains.

Sterling's gains against the safe-haven dollar could be limited by concerns about whether the UK's economic recovery can be sustained given a deepening recession in the euro zone, a key trading partner.

Analysts said concerns about potential political paralysis when U.S. lawmakers negotiate a solution to the looming "fiscal cliff" of tax hikes and spending cuts were also likely to weigh on riskier currencies, including sterling, lifting the safe-haven dollar and the yen.

EURO ZONE POSES RISK

The European Central Bank (ECB) decided to keep rates on hold at 0.75 percent, with President Mario Draghi saying a euro zone recovery is likely to be slow and gradual but solid.

Little sign of a recovery in the euro zone coming into the fourth quarter is likely to weigh on the single currency against sterling.

Data on Thursday showed German exports fell in September at the fastest pace since December 2011, raising concerns about the effects of the euro zone crisis on Europe's largest economy.

"It is going to be really hard for the euro to rally and Draghi's press conference seemed to say that the ECB has done enough and it is up to Spain and other governments to trigger help," Brooks said.

"So we are probably going to see the euro grind lower."

Concerns about debt problems in Greece and Spain remain, while data released this week has raised concerns the German economy is suffering the effects of deep economic problems in southern Europe.

"There are signs of recovery in the UK, but the euro zone economy is shrinking and that will dent business confidence and hamper sterling," said Nawaz Ali, market analyst at Western Union Business Solutions.

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