Sterling hits seven-year high against euro as ECB launches QE

LONDON: Sterling hit a seven-year high against the euro on Monday as the European Central Bank began an asset purchase programme that will pump over a trillion euros into the European currency bloc.

Britain's pound gained 0.4 percent against the shared currency to trade at 71.81 pence, its strongest since December 2007.

The ECB said on Monday that it and the euro zone's national central banks had begun buying government bonds under its quantitative easing programme, which is aimed at igniting inflation and growth in the euro zone.

In contrast to the ECB's ultra-loose monetary policy, investors are expecting the Bank of England's next policy move to be a rise in interest rates.

Interest rate differentials moved in favour of sterling on Monday, with the gap between the British 10-year government bond yield and the German 10-year yield reaching its widest since 1997, which some traders said was boosting the pound.

But Neil Mellor, a currency strategist at Bank of New York Mellon, attributed sterling's strength against the euro largely to its use as a safe haven from worries over Greece, saying any gains against the dollar would be shortlived.

"I don't think the Bank of England has any reason to drive interest rates higher," said Neil Mellor, a currency strategist at Bank of New York Mellon. "Sterling is more gripped by political forces than anything else at the moment."

Britain is less than two months away from the most uncertain and closely-fought general election in decades. Mellor said two-month implied sterling volatility was likely to spike on Tuesday, as investors hedge against big price swings in the currency up until the day of the election results.

Against the dollar, sterling bounced back by half a percent to $1.5105, after a greenback rally last week handed the pound its heaviest weekly losses in almost five years.

It skidded 1.3 percent to hit a four-week low on Friday after unexpectedly strong U.S. jobs numbers bolstered the view that the U.S. Federal Reserve will raise interest rates this year, before the Bank of England.

"The market is ... anticipating that the Fed will hike interest rates first, and with the payrolls last week, you've just had that story reassert itself," said Jane Foley, a currency strategist at Rabobank in London.