Sterling hits 5-wk high vs dollar after UK jobs data

Wed Dec 12, 2012 4:56pm IST

* More dovish FOMC easing could weaken dollar

* Sterling could bounce to September highs

* UK unemployment data unexpectedly falls

By Philip Baillie

LONDON, Dec 12 (Reuters) - Sterling hit a five-week high against the dollar on Wednesday after a better-than-expected UK jobs report and could gain further if the Federal Reserve aggressively eases monetary policy.

The Fed's Open Market Committee (FOMC) is expected to announce a fresh round of bond buying as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government's budget.

Traders said the pound could extend gains to hit early November highs of $1.6176 and even higher if the Fed opts for a more aggressive quantitative easing than the $45 billion a month of asset purchases most economists are expecting.

More quantitative easing usually pushes a currency lower as it increases its supply.

UK data showed the number of people claiming unemployment benefits fell unexpectedly in November, while the number of people in work hit a record high, helping lift the pound to a 5-week high of $1.6134.

Sterling was last up 0.2 percent on the day at $1.6145, up from around $1.6125 before the data was released with charts showing support around the 55- and 50-day moving averages at $1.6024 and $1.6032 respectively.

"The Fed has to deliver a lot for the dollar to get a durable weakening, a more dovish position (than $45 billion) could see sterling head back towards the (September high) around the $1.63 level in the coming weeks," said John Hardy, FX strategist at Saxo Bank.

Some strategists, however, said the pound's rise could be limited due to weaker UK growth forecasts.

"We still have a negative view on sterling at this stage, unless the Fed comes out with an Operation Twist replacement programme which is quite aggressive, adding more than $50/60 billion to the balance sheet," said Geoffrey Yu, currency strategist at UBS Warburg.

EURO DIRECTION

Strategists said with little UK data due this week, sterling could take its cues from the euro zone and ongoing negotiations around the U.S. fiscal cliff, a combination of tax hikes and spending cuts due to kick-in at the beginning of 2013 that threatens to derail U.S. growth.

Against the euro, sterling was flat at 80.70 pence. The euro hit a near three-week low of 80.35 pence on Monday after Italian Prime Minister Mario Monti announced his decision to resign.

With the euro zone struggling from a sharper slowdown than the UK and austerity and fiscal tightening likely to weigh on growth for years, BNP Paribas said its quant trading model suggested a short euro/sterling position.

Meanwhile, hints of policy easing measures from newly appointed Bank of England governor Mark Carney during a speech on Tuesday could see investors push sterling lower. Carney who is now Bank of Canada governor suggested there were benefits from having flexible inflation targets.

"In the near-term, the take-away from Governor Carney speech is that he is willing to extend the BoE's aggressive policy stance if it is considered necessary," Rabobank said in a note.

"This underpins our view that the BoE is likely to announce further QE this cycle; potentially in time for the February Inflation Report."

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