Sterling hovers near 1-month high versus euro before BoE

Thu Nov 8, 2012 3:34pm IST

* BoE decision at 1200 GMT, expected to refrain from more QE

* Likely to lift pound but any boost will be short-lived

* Outlook for UK economy still bleak given weak euro zone

* Pound up versus euro but hits 2-week low vs firmer dollar

LONDON Nov 8, (Reuters) - Sterling hovered close to a one-month high against a broadly weaker euro on Thursday and may gain a short-term boost if the Bank of England votes against more monetary stimulus.

Analysts, however, said any positive reaction to the bank's decision, due at 1200 GMT, would be limited 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 was knocked by fresh speculation that Spain is in no hurry to seek financial aid. But this also boosted safe-haven demand for the dollar, pushing the pound to a two-week low against the U.S. currency.

The euro fell 0.2 percent to a low of 79.73 pence , just shy of a five-week low of 79.71 pence hit on Wednesday. Further losses could see it target chart support at 79.64 pence, the 100-day moving average.

Against the dollar the pound fell 0.2 percent to $1.5940 , its weakest since Oct. 24. Traders reported demand to sell the currency at levels above $1.60 which may limit any gains.

"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.

"I don't expect the BoE to do anything today but I would expect the meeting minutes in two weeks' time to suggest that more QE is still on the table."

A majority of economists expect UK policymakers will not opt to extend asset purchases under their quantitative easing (QE) programme on Thursday due to stronger-than-expected UK growth in the third quarter.

Prior to that data, most in the market had expected more QE and some investors will therefore still be positioned for the risk of this. This would boost the pound if policy is left unchanged as these investors unwind those positions.

But investors will be wary 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.

The euro gained only a brief boost after Greece's parliament approved new austerity measures, needed to secure the next tranche of bailout money from international lenders.

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.

The pound was also expected to stay under pressure against the dollar as worries about potential political paralysis when U.S. lawmakers negotiate a solution to the looming 'fiscal cliff' dented riskier currencies and lifted the safe-haven dollar.

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