‘Oversold’ sterling recovers but vulnerable to weak economy

LONDON: Sterling recovered from a 2-1/2 year low against the dollar on Wednesday as investors bought the currency on the view that recent steep falls had gone too far, though a feeble UK economy was expected to keep it weak.

The pound was up 0.3 percent at $1.4953, pulling away from a low of $1.4832 hit on Tuesday after data showed UK manufacturing output contracted sharply in January.

Analysts said the pound could recover further in the coming days, with sterling/dollar's relative strength index, a chart indicator, suggesting the UK currency is oversold.

But any gains were expected to be limited and short-lived. Tuesday's data raised the prospect of the economy slipping into its third recession since the 2008 financial crisis and increased the likelihood that the Bank of England will extend bond purchases under its quantitative easing programme.

Central bank asset purchases increase the supply of a currency and drive down its value.

"There are signs of sterling looking a little oversold and this brings the potential for a recovery towards $1.50 or $1.51. But the bigger picture is for it to move lower," said Simon Smith, chief economist at FXPro.

He said any short-covering rally in the pound may be curtailed when UK finance minister George Osborne presents his budget on March 20.

Traders speculate that Osborne will announce a review of the BoE's remit and give it more leeway on inflation targeting, allowing scope for a further easing of monetary policy.

Sterling has been one of the worst performing currencies of 2013 and has lost more than 8 percent against the dollar and more than 7 percent against the euro so far.

The euro was down 0.5 percent at 87.02 pence, off a more than two-week high of 87.93 pence hit on Tuesday. It touched a 16-month high of 88.15 pence on Feb. 25.

Analysts at Lloyds said in a note that the pound was "vulnerable to the downside on bad UK data/news". However, a lack of major UK data in the coming days should keep it above support at $1.4823 and 88 pence per euro for now.