LONDON: Sterling inched up on Wednesday, as sovereign investors bought the pound after three straight days of losses had pushed it to a one-month low against the dollar.
However, gains were likely to be fleeting as a weak UK economy and the prospect of even more fiscal tightening will pile pressure on the Bank of England to print more cash under its quantitative easing programme next month. That will undermine the pound in the near term, traders said.
Sterling was marginally higher at $1.6015, having fallen to $1.5975 on Tuesday, its weakest since Sept. 10. Traders cited stop-loss orders at $1.6030 while support was at around $1.5960, the 38.2 percent retracement of sterling's rally from its low in July to its high of $1.6310 on Sept. 21.
"We will prefer to play sterling/dollar for the downside," said Geoffrey Yu, currency strategist at UBS. "The fiscal and monetary fundamentals suggest the pound will stay under pressure even if there is an economic recovery."
The International Monetary Fund slashed its forecasts this week to show the UK economy will shrink overall this year.
Economists' forecasts for the UK have worsened steadily this year and the third quarter is expected to show only very modest growth.
The weak data will increase concerns that the government will fail to deliver on its plans for cutting the deficit. This would raise the risk of the UK losing its prized AAA credit rating.
A patchy economic recovery also makes the BoE likely to opt for more quantitative easing (QE) next month. More QE is considered negative for the currency as it increases the supply of pounds in the market.
In a speech on Tuesday, BoE Governor Mervyn King while discussing the pros and cons of inflation targeting, suggested policymakers were focusing on QE as the main policy tool for providing further easing.
"This is consistent with market expectations that the BoE will announce another round of asset purchases at the November meeting," Morgan Stanley strategists said in a note.
"Sterling/dollar has extended the pullback below $1.60 level, opening the way for further sterling underperformance."
Against the euro, sterling was marginally higher on the day. The single currency was at 80.40 pence, off a three-week high of 81.00 reached on Monday. The single currency faces strong chart resistance at the mid-September peak of 81.14 pence and the 200-day moving average at 81.18 pence.
Traders cited talk of demand for sterling against the euro by a UK corporate which would offer support to the pound early in the London session.
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