Sterling on a roll

Sterling extended broad-based gains on Thursday as investors pared back expectations of further stimulus from the Bank of England, putting the currency firmly on track to rise against the euro to levels not scaled since mid-2010. The pound rose to its highest in nearly 20 months against the euro and a five-month high against the US dollar, all of which helped it to climb to a 20-month peak on a trade-weighted basket of currencies, data from the Bank of England showed.
More gains are likely as investors seek to exit the euro zone troubles and are wary of piling into the US dollar as further easing by the Federal Reserve is still an option. In contrast, minutes from the BoE's last policy meeting released on Wednesday showed the committee voted 8-1 against further stimulus, with one policymaker Adam Posen who had consistently voted for more stimulus moving out of the dovish camp and another now seeing the decision as "finely balanced".
"The minutes were the trigger, but sterling's gains undoubtedly show that investors who dislike the euro and the dollar are preferring the pound," said Adrian Schmidt, FX strategist at Lloyds TSB. The euro fell to 81.625 pence, its lowest level since end-August 2010. Traders cite an option barrier at 81.50 pence with near-term support around 81.43 pence, a level seen on August 23, 2010. A break below that could see it ease towards 80.67 pence, the 2010 low struck in June.
A widening of spreads between 10-year German bunds and comparable UK gilt yields have also worked in favour of sterling against the euro. Sterling rose to a five-month high of $1.6078, with talk of an option barrier at $1.61 likely to cap gains for now. It was marginally higher on the day at $1.6040 with Commerzbank chartists saying that the move above $1.6070, meant cable would target $1.6170, the October 2011 high and the 61.8 percent retracement of the move seen 2011-2012.
The medium-term trend for sterling also looked bullish on the charts with some pointing to a golden cross, with the 55-day moving average crossing the 200-day moving average. A golden cross is formed when the former rises through the latter and last time it happened in September 2010, sterling rose from around $1.5400 to above $1.6500.