Sterling fell against a rebounding US dollar on Tuesday as investors unwound long positions, although it edged up against the euro as sovereign debt worries put the single currency under pressure. Expectations that the European Central Bank will raise interest rates ahead of the Bank of England are likely to offer the euro support against the pound, however, with some expecting the pair to hold above 85.72 pence, the low struck on Monday.
The euro fell 0.3 percent on the day to 85.95 pence, retreating from a five-week high of 86.35 pence hit earlier in the session. The single currency has been hurt since by widening Greek spreads over German Bunds and the focus turning back to concerns that policymakers are struggling to agree measures to resolve the debt crisis.
Simon Smollett, senior options strategist at Credit Agricole-CIB, said that over the next three months the euro could head lower and fall to as low as 84 pence and even 82 pence. Against the dollar, sterling was down 0.3 percent at $1.6152 with sovereign accounts steadily bidding the pound in the $1.6140/50 area. The BoE's monetary policy committee starts its meeting on Wednesday. Economists expect rates to be kept at a record low of 0.5 percent, although the debate within the nine-member MPC could be lively as divisions grow on when the BoE should raise.
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