Sterling falls vs euro as German economic sentiment improves

Tue Dec 11, 2012 4:35pm IST

* Pound dips versus euro after better-than-forecast ZEW

* Sterling seen vulnerable to weak economic data

* BoE's King warns on growing currency competition

By Nia Williams

LONDON, Dec 11 (Reuters) - Sterling dipped against the euro on Tuesday, with the shared currency gaining after a better-than-expected German economic sentiment survey spurred some optimism among investors.

The ZEW survey of sentiment in the euro's zone largest economy rose sharply in December to enter positive territory for the first time since May.

That pushed the euro up 0.2 percent against the pound to a session high of 80.70 pence. It recovered from a near three-week low of 80.35 pence hit on Monday after investors were unsettled by Italian prime minister Mario Monti's surprise decision to resign early.

Sterling was steady against the dollar at $1.6078, with technical charts showing support around the 55- and 50-day moving averages at $1.6036 and $1.6023 respectively.

Strategists said the pound looked vulnerable to selling on concerns about weakness in the UK economy.

"Euro/sterling has seen a move on the back of the ZEW, while looking at cable (sterling/dollar) around $1.61, it still seems a little elevated," said Jeremy Stretch, head of FX strategy at CIBC World Markets.

"With the risk we could see a further trigger of fragility in labour market data tomorrow, it seems in the short term any rallies could be worth fading."

A Reuters consensus forecast shows the UK unemployment rate, is expected to be unchanged at 7.8 percent when it is released on Wednesday, but any unexpected rise could knock the pound lower.

Concerns about the UK economy have been increasing since finance minister George Osborne downgraded growth forecasts and said the country will miss debt-cutting goals in his mid-year budget statement last week, raising the possibility the country will lose its prized AAA credit rating.

A survey showing UK house prices fell faster than expected in November added to those worries, although with no other domestic data scheduled for Tuesday sterling was expected to take its lead from developments in the euro zone.

Concerns about political uncertainty in Italy were expected to limit both sterling and euro gains against the highly liquid dollar, which is considered a safe haven currency by investors and tends to rally in times of market tension.

KING'S WARNING

Analysts said a speech from Bank of England governor Mervyn King in New York on Monday, in which he warned that too many countries were trying to weaken their currencies, was unlikely to impact the value of sterling.

The speech did however highlight the BoE's concern that the UK will struggle to boost exports while the pound remains relatively strong.

Trade-weighted sterling was last at 83.9, according to BoE data, within reach of the peak of 84.7 hit in September. A rise above that level would take the index to its highest since November 2008.

"This is not meant to be indicative of any kind of policy towards sterling," said Steve Barrow, head of G10 currency research at Standard Bank.

"All King is recognising is the possibility this is continuing to grow because the world is not recovering as many people thought it would. If monetary policy is very stimulative then countries may be tempted if they need growth to steal it from someone else through the exchange rate."

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