Sterling climbs vs dollar as euro zone jitters soothed

LONDON: Sterling turned positive against the dollar on Monday, tracking a bounce in the euro/dollar exchange rate after comments from a top euro zone policymaker calmed immediate fears about stability in the region.

Eurogroup chairman Jean-Claude Juncker said the European Stability Mechanism will not have preferred creditor status, removing a potential reluctanceamong investors to lend to countries such as Ireland and Portugal which could make it easier for them to re-enter the markets.

Cable tracked gains in euro/dollar to reach $1.6200, up almost 0.1 percent on the session, as investors recovered from concerns that euro zone finance ministers had decided to hold off agreeing on the next tranche of emergency loans to Greece.

Juncker's comments, made in Luxembourg where finance ministers are meeting to discuss the bailout funds, also helped euro pare losses against the pound to reach 88.27 pence, after earlier slipping to 87.90 pence.

"The market overreacted this morning to news of the euro zone finance ministers' meeting. There are some headlines coming out now on the ESM and reports of the European Financial Stability Fund expansion," said Jane Foley, senior currency strategist at Rabobank.

"On the assumption that we get further reasonable news from the finance ministers and assuming the euro remains reasonably well supported above last Thursday's close at 87.95 pence, we will be heading back towards 90 pence."

Analysts said concerns about the health of the UK economy could add to euro/sterling momentum, despite a vote of confidence for the newly reshuffled Greek cabinet on Tuesday.

The pound has struggled in recent weeks under a slew of lacklustre economic data pointing to slowing growth, pushing the euro up from a low of 86.11 pence hit on May 26.

Net public sector borrowing figures due on Tuesday are widely expected to add to the gloom over the UK budget deficit, forecast to come in at around 15.75 billion pounds in spite of the government's austerity drive.

"Sterling is up against the euro today so far but it's a battle of two ugly currencies," said Neil Mellor, currency strategist at Bank of New York Mellon.

"UK economic growth appears to be faltering and there is yield to speak of. We are in a post-crisis world and both currencies are suffering."

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Support for euro/sterling is seen around 87.93 pence, the 50 percent retracement of the move from the May 26 low to the June 8 high of 89.76 pence.

Lena Komileva, economist at Brown Brothers Harriman, said she expected the pair to move higher on expectations the European Central Bank tighten monetary policy while the Bank of England is expected to remain dovish, once the current jitters over Greece subside.

"I see an initial move towards 90 pence as the euro zone is forced to approve a second Greek deal, while the market prices further back the chance of the BoE hiking over the next 12 months," she said. "The ECB is much more intolerant of inflation that the BoE."

The ECB is expected to raise interest rates to 1.5 percent next month while short-term rate markets are pricing in a first rise from a record low of 0.5 percent in UK rates only in mid-2012.

Investors will also scrutinise the BoE's Monetary Policy Committee meeting minutes for June, released on Wednesday, for clues on how new policymaker Ben Broadbent voted in his first meeting since replacing arch-hawk Andrew Sentence.

Copyright Reuters, 2011