Sterling near 15-month low

LONDON: Sterling slid to a 15-month low against a trade-weighted basket of currencies and the euro on Thursday on month- and quarter-end selling, with more losses likely as investors add to bearish bets on the view that UK rates will stay low in the near term.

The single currency was boosted by news that Greece's parliament had approved a second bill of austerity measures and by favourable interest rate differentials.

European Central Bank President Jean-Claude Trichet reiterated his hawkish bias towards inflation, backing strong market expectations that the bank will raise rates next week.

The euro rose to 90.705 pence, its highest level since mid-March 2010, with traders citing steady month-end demand from a euro zone central bank and a US investment bank.

It was last trading at 90.40 pence and a close above the early May high of 90.43 pence would be seen as technically bullish, potentially allowing a test of the March 1, 2010 high of 91.50 pence then the late Oct, 2009 high of 92.40 pence.

"We do see some funny movements in the crosses at every half year ending and there was some large scale buying of euro/sterling, especially from one central bank," said Simon Smith chief economist at FXPro.

"Euro/sterling should stay supported above 90 pence as there is a tendency to buy the euro once these hurdles related to Greece are cleared."

Analysts said the approval of the austerity measures had put to rest immediate worries about a default by Greece and the risk of contagion. This was likely to give a short term boost to riskier currencies.

Investors will turn their attention to the next policy meeting of the European Central Bank, which in contrast to the Bank of England, is in the midst of monetary tightening.

Barclays Capital changed its forecast and now expects the Bank of England to raise rates by 25 basis points in May 2012, compared with its previous forecast for a rise in November 2011.

It said it has pushed back the timing after downgrading GDP forecasts. BarCap also saw indications that the BOE's rate setting committee was particularly sensitive to the domestic demand outlook and especially worried by the weakness of household consumption.

ABOVE $1.60 IS A SELL

Investors have steadily pared back chances of a rate hike, with most expecting the first quarter percentage point increase only in the middle of 2012. At the start of the year, investors were pricing in at least three rate hikes by the Bank of England in 2011.

Sterling losses against the euro saw it give up gains against the dollar and put it on track for its worst monthly percentage fall since November. It hovered near its 200-day moving average of $1.6039, down 0.1 percent on the day.

It had fallen to as low as $1.5973 with traders citing offers below $1.5970 while on the upside option expiries at $1.6120 are likely to check gains.

"We are not convinced Cable should be above $1.60 and every rise above that level is a selling opportunity," said Ankita Dudani, G-10 currency strategist at RBS.

Analysts say a rather gloomy outlook for the UK economy would keep the pound subdued against the euro and growth-linked currencies like the Australian dollar.

Latest data showed British consumer confidence fell in June, a private sector index showed on Thursday, while UK house prices were flat.

The BoE's quarterly Credit Conditions Survey showed British banks expect demand for business credit to level off in the third quarter of the year, after rising in the second quarter.

On Tuesday, Bank of England policymakers kept alive the possibility of more monetary easing if the economy's anaemic recovery slows even more.

Copyright Reuters, 2011