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Sterling gains vs euro on Spain worries, BoE hold
April 5, 2012 / 2:17 PM / 5 years ago

Sterling gains vs euro on Spain worries, BoE hold

* Sterling gains vs euro despite factory output data

* Euro under pressure on concerns about Spanish yields

* BoE keeps rates on hold, QE total unchanged

By Nia Williams

LONDON, April 5 (Reuters) - Sterling hit a 2-1/2 month high against the euro on Thursday, with worries about the euro zone debt crisis and rising Spanish borrowing costs outweighing a drop in UK factory output.

Bank of England policymakers voted to keep interest rates on hold at 0.5 percent and the quantitative easing total unchanged at 325 billion pounds.

The unchanged policy course was widely anticipated by the market and meant investors were more focused on developments in the euro zone. Concerns about Spain’s ability to meet its budget targets sent the Spanish yield spread over German Bunds to its widest level since November.

The euro hit a session trough of 82.38 pence, its lowest level since January, with strong support seen around the Jan. 9 low of 82.22 pence. There was significant buying interest from companies reported around 82.00 pence.

“In the last couple of days with Spanish bond yields rising people have tried to express that through euro/sterling and now we are heading towards the January lows,” said Daragh Maher, HSBC currency strategist.

A break through those lows would open up a test of the August 2010 trough of 81.43 pence, but Maher said euro/sterling would struggle to break 82.22 pence unless euro/dollar also fell below $1.30.

The dollar has rallied broadly this week after minutes from the Federal Reserve’s March meeting on Tuesday showed only two of the 10 policy-setting committee members saw the case for additional monetary stimulus in the light of an improving economy.

On Thursday the greenback was also boosted by a government report showing U.S. jobless claims fell to the lowest level in four years.

The pound fell 0.4 percent to $1.5824, triggering reported stops below the 200-day average at $1.5848.

With U.S. Treasury yields rising on speculation the Fed may not opt for another round of asset purchasing, some analysts said the minutes of this month’s BoE meeting, released later in April would be more significant for the pound.

The BoE’s current asset purchase programme finishes in May and market players would be looking for any signs that policymakers are considering extending the programme, with some economists forecasting an extra 25 billion pounds of QE.

“People had already decided when they came in this morning that the May (BoE) meeting would be a more interesting talking point than April,” said HSBC’s Maher.

Quantitative easing involves printing money to stimulate growth and can crimp demand for a currency.

UK DATA IN FOCUS

Sterling came under pressure earlier in the session after data showed a surprise fall in UK manufacturing output that slumped by 1.0 percent in February after a January’s figures were revised downwards, giving an annual decline of 1.4 percent.

It was the biggest monthly fall in almost a year and confounded economists’ forecasts of a 0.1 percent rise.

But despite the sharp fall, analysts said the data was outweighed by a marked improvement in UK services, construction and manufacturing PMIs (purchasing managers’ indexes) this week that fuelled hopes the country could avoid slipping into recession.

“There has been limited market reaction to the data. The fact we have had a hat-trick of three strong PMIs is more important,” said Michael Sneyd, FX strategist at BNP Paribas.

Strong UK PMI numbers contrasted with euro zone PMI surveys which have edged below 50, marking a contraction in activity and fanning demand to buy the pound against the euro. (Editing by Jeremy Gaunt.)

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