Month-end euro demand knocks sterling

March 29, 2013

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Month-end investor demand for euros pushed sterling off a two-month high on Thursday, but the pound looked likely to resume its rise soon given concerns about the ramifications of a bailout deal for Cyprus. The euro was last up 0.15 percent at 84.53 pence, having earlier dropped as low as 84.155 pence, its weakest since January 24. Traders reported strong demand for euros for month- and quarter-end, especially ahead of the long Easter weekend.

But the common currency remains vulnerable to concerns about the precedent set by the Cypriot rescue, which imposed hefty losses on wealthy depositors and has led to capital controls. "If the market had been running generally short of euros then investors would probably want to square up before the long weekend," said Steve Barrow, head of G10 currency research at Standard Bank. The euro has lost around 4 percent against the pound since hitting a peak of 87.93 pence just over two weeks ago. Renewed losses could take it down towards its 100-day moving average, currently around 83.56 pence.

Cyprus's banks reopened for the first time in nearly two weeks on Thursday, but with strict controls on the amount of cash that can leave the island state. "Even though Cyprus is small, the impact of its bailout, both financially and politically, is the biggest of any bailout. This will have repercussions for the euro over the coming months," said Simon Smith, economist at FXPro. The pound was up 0.25 percent against the dollar at $1.5170, recovering from a drop to $1.5092 on Wednesday following weak UK current account data. But analysts said volumes were thin before the long weekend, and worries about a faltering UK economy would keep sterling weak.