LONDON: Sterling hit a more than six-year high against the euro on Wednesday after an adviser to Europe's highest court left the door open to the European Central Bank embarking on outright government bond buying.
Sterling also rose against the dollar with the greenback fell on weaker-than-expected retail sales data out of the United States. Retail sales fell 0.9 percent in December as demand fell nearly across the board. It was the largest decline in 11 months.
Sterling was up 0.3 percent on the day at 77.44 pence per euro, having risen to as high as 77.33 pence per euro earlier in the day. Against the dollar, it was up 0.4 percent at $1.5220.
Traders said the pound was still drawing support from expectations the UK economy would outstrip its peers in Europe. While a fall in inflation and some more measured numbers on growth have led investors to push back the timeline on a first rise in Bank of England interest rates, that outlook still contrasts with the threat of deflation facing the euro zone. Bank of England chief Mark Carney told a panel of lawmakers that recent drop in oil prices was positive for the UK economy.
The euro weakened broadly on Wednesday after an adviser to the European Court of Justice said an ECB bond-buying programme was legal under certain conditions.
The ECB wraps up its next policy meeting on Jan. 22. Stephen Gallo, an FX strategist at BMO, said the market, and importantly central bank reserve managers globally, seem to be adding to their long sterling positions versus the euro.
"Given monetary policy divergence between the BoE and the ECB, I'm sceptical that the market is overly short of pounds," he said.
"You would think the market is net short sterling against the dollar but reserve managers have probably moved to being net sellers of the euro.
We think the pound will head into the 76-76.50 area against the euro but will base thereafter." Still, Gallo agrees with a raft of strategists who expect the pound to weaken against a stronger dollar this year.
Also, Britain is facing the most open and uncertain general election of modern times in May, even as the country struggles with growing fiscal pressures and a current account deficit running of around 6 percent.
"While Carney highlighted the positives for the UK economy from low inflation we expect the sterling downtrend to remain in place," Morgan Stanley said in a note. "Sterling rebounds remain a sell, in our view, and we maintain our medium term target for a decline into the $1.40 area."
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