Sterling rose strongly against the euro on Thursday as the single currency came under pressure on dovish talk from the European Central Bank, while the pound gained some relief as the Bank of England held back from pursuing more monetary stimulus. The euro fell broadly after ECB President Jean-Claude Trichet highlighted downside risks to economic growth in the eurozone after leaving interest rates on hold.
Markets believe future rate hikes are off the table and the ECB may even need to cut rates by year-end. Earlier the Bank of England's Monetary Policy Committee left interest rates on hold as expected and stuck with a pause in its asset purchase programme. Economists had not expected further stimulus but traders said some speculators had established short positions in the pound, betting the MPC may be forced to act amid deteriorating UK data and worries over global growth.
The euro fell 1 percent on the day to a two-week low of 87.13 pence in afternoon trade. Traders cited persistent interest from a UK clearer in buying the pound against the shared currency. Technical analysts highlighted support from the 200-day moving average at 86.92, which the euro has held above on a closing basis since February, while bids were seen lower down at 86.50/40.
"There could be a degree of catch-up for euro/sterling from here. It can fall to 85 pence or below," said Hardman. Sterling traded with gains of around 0.4 percent versus the dollar at $1.6062, reversing earlier losses which took it to an 8-week low of $1.5914 before the BoE announcement. Technically the outlook was still heavy after this week's break below the 200-day moving average around $1.6130. Key support was around the July low of $1.5781.
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