LONDON: Sterling edged lower on Wednesday and could come under more pressure if the Bank of England hints at future additional monetary easing in its quarterly inflation report, due later in the session.
The BoE is expected to slash its growth and inflation forecasts for 2012 and beyond, and traders will scrutinise whether Governor Mervyn King is more dovish in his comments.
That would increase bets for more quantitative easing (QE) or even an interest rate cut later this year to support the economy, which is mired in recession. All of which is expected to keep sterling under pressure in the near term with some expecting the euro to rise to 80 British pence.
The euro was up 0.1 percent at 79.40 pence, not far from a one-month high of 79.63 pence hit on Monday. Against the dollar, the pound was down 0.3 percent at $1.5575.
"The Governor will be questioned about whether and why QE and low rates are not boosting bank lending. He will promise more accommodation and the pound will remain under mild downward pressure. Euro/sterling can move above 80 pence," said Kit Juckes, currency strategist at Societe Generale.
The euro has recovered in recent days on expectations the European Central Bank may take action to lower borrowing costs for Spain and Italy.
Analysts said this had led investors to shift their focus back to poor UK economic fundamentals, w hich had previously taken a back seat as the market concentrated on euro zone debt problems.
Recent data has confirmed the economy is struggling and surveys last week showed growth in Britain's dominant services sector slowed in July while manufacturing activity shrank. That pointed to a poor start to the third quarter.
Investors are increasingly concerned that the deeper the UK slides into recession, the more difficult it will be for the government to achieve targets for reducing its hefty fiscal deficit. That could see Britain lose its prized triple-A credit rating, another factor that is likely to weigh on sterling.
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