Sterling stays weak on bets rates will remain low, eyes on ECB

LONDON: Sterling edged up a touch against the dollar on Thursday but stayed close to an 18-month low, as investors remained wary after a U-turn by two Bank of England policymakers that confirmed interest rates will stay low for a long time.

Sterling had fallen to as low as $1.5076 on Wednesday after minutes from the latest meeting of the BoE's monetary policy committee showed two members had dropped their call for a hike in rates, leaving all nine members in favour of keeping rates where they are.

Martin Weale and Ian McCafferty, who since August had called for an end to record-low interest rates, said a rate rise now might cause below-target inflation to become entrenched.

The minutes led investors to push back expectations for a first UK interest rate hike well into next year - a big change from six months ago, when most were calling for a rise early this year and some expected it by the end of 2014. .

Sterling last traded at $1.5155, up 0.1 percent on the day but close to an 18-month trough at $1.5036.

With all eyes on a crucial European Central Bank meeting later in the day at which a quantitative easing programme is expected to be unveiled, the pound was flat near a six-year high against the euro at 76.61 pence.

"I'm very skeptical of the scenario of the euro weakening on QE," said Simon Smith, chief economist at online broker FxPro. "There's so much in the price now that (the ECB) has to go very bold to get further downward traction on the euro."

A euro zone source told Reuters on Wednesday that the ECB's Executive Board had proposed a programme that would see it buy 50 billion euros ($58 billion) in bonds per month starting in March.

Smith said whatever was announced, the euro was likely to see a bounce against sterling in the short term, but others disagreed.

"If the ECB wants a weaker euro, EUR/GBP will have to participate, and we see a window of GBP strength before a political risk premium ahead of May elections re-emerges," Chris Turner, a currency strategist at ING, said in a note.