LONDON: Sterling fell to its lowest in two weeks against the euro on Thursday as soft UK data kept alive the prospects of more monetary stimulus in coming months.
The Bank of England kept interest rates on hold and its quantitative easing programme unchanged at the end of a two-day meeting on Thursday, but expectations are growing that it may have to ease policy as early as next month as the economy falters.
"People were expecting policy on hold with the focus now shifting to the next month," said Craig Erlam, market analyst at Alpari. "We expect the pound to come under pressure as there are plenty of expectations that the BoE could do more asset purchases next month."
More bond buying or quantitative easing is usually negative for the currency as it increases the supply.
The European Central Bank also kept rates unchanged, with the euro buoyed by expectations Spain will soon need to seek a bailout.
The single currency rose to 80.51 pence, its highest level since Sept. 19. Strong resistance was expected around 81 pence, and at the September high of 81.14 pence.
The euro was also higher against most other major currencies, helped by the ECB's decision to keep interest rates unchanged at 0.75 percent rather than cutting them.
Sterling climbed against the dollar after the BoE policy decision and also tracked gains in the euro against the greenback during ECB President Mario Draghi's news conference.
It rose to a session high of $1.6171 before paring gains to last trade up 0.5 percent at $1.6163.
The trade-weighted sterling index remained pinned at a two-week low of 83.9 and strategists said more weak data could leave the pound vulnerable to further falls.
WEAKER OUTLOOK AHEAD
Britain's economy shrank by 0.4 percent in the second quarter of 2012, extending a recession that started late last year as output wilted under the pressure of government austerity and the euro zone debt crisis.
Sterling has come under pressure against the single currency as softer-than-expected economic data this week highlighted the fragility of the UK economy.
A composite of this week's data releases suggested the UK economy grew only marginally in the third quarter with construction sector activity still contracting and the dominant services sector growing at a much slower pace than anticipated.
Data on Thursday pointed to more weakness. Mortgage lender Halifax said British house prices dropped 0.4 percent in September after a bigger than initially estimated 0.5 percent fall in August, leaving prices in the third quarter 1.2 percent lower than a year earlier.
Strategists said lacklustre data could fuel speculation BoE policymakers will opt to extend their asset purchase programme at their next meeting in November.
"It may be that the run-up to them announcing QE tends to be more negative for sterling than the event itself. But the risk for sterling might be pointing to a move back below $1.60," said Simon Smith, chief economist at FxPro.
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