Sterling at 5-week high versus euro after BoE holds fire

Thu Nov 8, 2012 6:53pm IST

* BoE leaves interest rates, QE total unchanged

* Pound rises as some had seen a risk of more QE

* But boost seen short-lived, especially against dollar

* Outlook for UK economy still bleak given weak euro zone

By Jessica Mortimer

LONDON Nov 8, (Reuters) - Sterling rose to a five-week high against the euro on Thursday after the Bank of England left interest rates and its quantitative easing total 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.

But analysts said the pound's gains could be limited, especially against the safe-haven dollar, due to concerns about whether the UK's economic recovery can be sustained given a deepening recession in the euro zone, its key trading partner.

The euro fell 0.2 percent to 79.64 pence, its lowest since Oct. 1.

It stalled at chart support at the 100-day moving average at 79.64 pence, which also corresponds to the 21-week average, with traders reporting euro zone exporters were buying euros around that level.

But further falls could see the euro drop towards the late September low of 79.23 pence.

Against the dollar, the pound was flat at $1.5988, recovering from an earlier two-week low of $1.5930. However, traders reported demand to sell the currency at levels above $1.60 which may limit any gains.

"Sterling benefited from the fact the Bank of England didn't do anything ... But given risk appetite is suffering, sterling/dollar hasn't got a lot of upside," said Gavin Friend, currency strategist at National Australia Bank.

Analysts said worries about potential political paralysis when U.S. lawmakers negotiate a solution to the looming "fiscal cliff" was likely to weigh on riskier currencies, including sterling, and lift the safe-haven dollar.

WEAK EURO ZONE POSES RISK

The euro was also knocked by fresh speculation that Spain is in no hurry to seek financial aid and before a news conference at 1330 GMT by European Central Bank President Mario Draghi, who may strike a downbeat tone after recent weak euro zone data.

Draghi is due to speak following the ECB's decision to leave interest rates on hold.

Concerns about debt problems in Greece and Spain remain, while recent data has suggested the German economy is suffering the effects of deep economic problems in southern Europe. Data on Thursday showed German exports fell in September at the fastest pace since December 2011.

Analysts said concerns remained about the UK economy's vulnerability to a deepening euro zone slowdown and the risk that the BoE may opt for more QE in December or early next year.

QE is seen as negative for the pound because it boosts the supply of the currency in the market.

"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.

He added he expected the minutes to the BoE meeting to suggest more QE was still on the table. Prior to the UK third quarter data, which showed the economy unexpectedly grew by 1.0 percent, most in the market had expected more QE in November.

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