LONDON: Sterling started the week on a strong footing, gaining against the euro as subdued economic data highlighted the divergent outlooks for monetary policy at the European Central Bank and the Bank of England.
German service-sector business activity grew more slowly in June and new orders rose at a slightly weaker rate, a report showed on Monday. French business activity shrank more than expected and the wider euro zone private sector also slowed, all of which meant the ECB was likely to keep policy accommodative.
The data followed a weekend interview in which ECB President Mario Draghi laid out the case for sticking with the bank's programme of stimulus. He also said quantitative easing may be used if inflation expectations deteriorated in the medium term.
The euro was down 0.1 percent against the pound at 79.82, not far from its recent 1 1/2-year low of 79.59 pence . Against the dollar, it was up at $1.7030, with bulls eyeing the 5 1/2-year high of $1.7064.
"Disinflation is the biggest problem for the ECB at the moment," said Adam Myers, the head of FX strategy at Credit Agricole. "They're putting on a brave face and telling the market they're not really that focused on it ... and that's where the second-guessing comes in.
"If the market calls Draghi's bluff at the ECB and they start betting that QE (quantitative easing) is going to happen, then euro/sterling lower will probably be a better trade than sterling/dollar higher, but I still think that's a couple of weeks away."
The pound was also buoyed by comments made over the weekend by David Miles, a known dove on the BoE's interest-rate-setting Monetary Policy Committee, who signalled he would vote for a rate hike before his term ends in 11 months' time.
"The Miles comments over the weekend suggest that there are going to be very few places better than the British pound within the G10 to park your money over the next month," said Myers.
The pound has gained about 10 percent in the past year against a trade-weighted basket of currencies. Expectations are a rapidly improving UK economy will prompt the BoE to raise rates before its peers in Europe and the United States.
Speculators are raising bets on sterling as they look for a trend in the absence of bigger moves by the euro, dollar and yen. Data from a U.S. financial watchdog showed long positions in pound futures rose to the highest level since late 2007 last week.
Morgan Stanley said in a note that sterling was likely to rise further against the euro, adding that the single currency would probably target 78 pence in the coming months.
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