LONDON: Sterling eased against the euro on Wednesday and is likely to stay subdued on weak economic data that may keep alive expectations of more monetary easing by the Bank of England in the near term.
The euro was supported by lingering hopes that the European Central Bank could take bold action to tackle the euro zone debt crisis this week, despite strong German opposition to the bank buying government debt in the secondary market to lower Spanish and Italian borrowing costs.
The euro was up 0.2 percent at 78.635 pence, extending gains into a second straight day and not far from its July 17 high of 78.77 pence. Traders cited an option barrier at 78.75 pence which could limit gains.
Still, if there is a weak reading in the UK manufacturing sector PMI survey for July due out at 0828 GMT, coming just hours after soft housing sector numbers, that could put more pressure on sterling, traders said. Data from Nationwide showed British house prices fell at their fastest annual pace in nearly three years last month.
"The UK is likely to see a further PMI fall, after already having seen house price deflation accelerate," said Kit Juckes, currency analyst at Societe Generale. "I remain nervous of euro/sterling corrections. We are closing our short euro/sterling (position), intending to get back in at better levels."
Sterling was flat against the dollar, having lost ground earlier in the week, and was last trading at $1.5678, still below a five-week high of $1.5768 hit on Friday and staying below chart resistance at its 200-day moving average around $1.5741.
Analysts said most currencies were likely to trade in a tight range ahead of the ECB decision on Thursday. The meeting is expected to overshadow decisions by the Bank of England and the Federal Reserve after last week's pledge by President Mario Draghi to do "whatever it takes" to protect the euro.
If the ECB delivers bold measures, it could boost investor appetite for taking on risk, helping sterling against the dollar, but if it disappoints it could lead to sharp falls in currencies perceived as higher-risk. The euro is also likely to weaken in that case.
Traders are also mindful of the UK's close trading ties with the euro zone and its vulnerability to economic and debt problems in the region, as suggested by data last week showing a sharp contraction in the UK economy in the second quarter.
Morgan Stanley revised their UK growth forecasts lower, just a few days after revising down their euro-area forecasts.
"Growth is now expected at -0.5 percent in 2012 and 1 percent in 2013, (down) from +0.5 percent and +1.8 percent previously. We expect the BoE to have to do more quantitative easing to the tune of 100 billion pounds by first quarter 2013 and (lower rates) by 25bps by end of the year," the firm said.
The BoE is widely expected to leave policy unchanged on Thursday.
Comments
Comments are closed for this article.