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Sterling rises vs dollar after central bank holds fire
March 7, 2013 / 3:18 PM / 5 years ago

Sterling rises vs dollar after central bank holds fire

* Sterling climbs vs dollar after BoE keeps policy unchanged

* Gains expected to be temporary, risk of more QE remains

* Euro strengthens after ECB avoids easing hints

By Nia Williams

LONDON, March 7 (Reuters) - Sterling rose against the dollar on Thursday after the Bank of England decided not to restart its asset purchase programme, wrongfooting investors who had positioned for more monetary stimulus.

The pound’s gains are expected to be short-lived, however. Many strategists said the central bank’s decision to hold fire now will simply reinforce speculation that more money will be injected into the economy next month instead.

“We’re selling into this rally and don’t think sterling strength will last more than 24 hours. The economic outlook and policy outlook both point to more asset purchasing in the months to com,” said Adam Myers, senior FX strategist at Credit Agricole.

Sterling rallied to a session high of $1.5083 against the dollar, from $1.4991 before the BoE announcement. It was last up 0.3 percent on the day at $1.5059, holding above a 2-1/2 year low of $1.4965 hit during Asian trade.

The pound retreated against the euro however, after European Central Bank kept rates on hold and President Mario Draghi gave no hints about easing monetary policy in months ahead at his monthly news conference.

The euro rose 0.8 percent to 87.05 pence, pulling away from a session low of 86.33 pence hit after the BoE announcement.

BoE policymakers voted to keep the bank’s quantitative easing programme at 375 billion pounds and rates on hold at 0.5 percent. The decision was in line with economists’ consensus forecasts, although many market players had been braced for looser policy.

Asset purchasing involves printing money to buy bonds and tends to weigh on a currency by boosting its supply.


Market players said demand for sterling would be curbed by expectations incoming BoE governor Mark Carney could introduce more radical easing measures when he take the helm in July.

The pound fell earlier in the session after a media report said finance minister George Osborne will change the inflation remit for Carney, and flag looser monetary policy in his March budget statement.

“Every time Mark Carney’s name comes up the pound gets battered,” said Lee McDarby, head of dealing for corporate and institutional treasury at Investec.

“Anyone who seems more dovish than (current BoE governor) Mervyn King is not good for the pound in the short term. It remains to be seen whether it will be good for the pound in the longer term.”

Sterling has been one of the worst performing major currencies in 2013, falling nearly 8 percent against the dollar.

Better-than-expected data from the dominant British services sector this week failed to completely dispel concerns that the fragile economy could slip back into another recession.

The loss of Britain’s prized triple-A credit rating after a Moody’s downgrade has also unnerved investors and called into question the government’s strict austerity measures.

Morgan Stanley strategists said the policy debate in the UK was likely to heat up ahead of the budget on March 20 and curb appetite to buy the pound. They said any rebounds in sterling should be viewed as selling opportunities, targeting a decline towards the $1.46/1.45.

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