LONDON: Sterling inched up on Wednesday, as sovereign investors bought the pound after three straight days of losses had pushed it to a one-month low against the dollar.
Gains were expected to be temporary as a weak UK economy and the prospect of even more fiscal tightening pile pressure on the Bank of England to print more cash under its quantitative easing programme next month pile pressure on the currency.
Sterling was marginally higher on the day at $1.6015, having fallen to $1.5975 on Tuesday, its weakest since Sept. 10. Traders cited stop-loss orders at $1.6030 while support was at around $1.5960, the 38.2 percent retracement of sterling's rally from its low in July to its high of $1.6310 on Sept. 21.
"We will prefer to play sterling/dollar for the downside," said Geoffrey Yu, currency strategist at UBS. "The fiscal and monetary fundamentals suggest the pound will stay under pressure even if there is an economic recovery."
The International Monetary Fund slashed its forecasts this week to show the UK economy will shrink overall this year.
Economists' forecasts for the UK have also been cut steadily this year and the third quarter is expected to show only minimal growth.
Budget concerns are growing as a result, with Prime Minister David Cameron admitted in a keynote speech at his party's annual conference that it would now take longer to get the deficit down.
He gave little sign of anything new the government would do to spur growth, without which analysts say its deficit plans look tenuous. That in turn raises the risk of the UK losing its prized AAA credit rating.
A patchy economic recovery also makes the BoE likely to opt for more quantitative easing (QE) next month, negative for the currency as it increases the supply of pounds in the market.
In a speech on Tuesday, BoE Governor Mervyn King while discussing the pros and cons of inflation targeting, suggested policymakers were focusing on QE as the main policy tool for providing further easing.
"This is consistent with market expectations that the BoE will announce another round of asset purchases at the November meeting," Morgan Stanley strategists said in a note.
"Sterling/dollar has extended the pullback below $1.60 level, opening the way for further sterling underperformance."
Against the euro, sterling was flat on the day. The single currency was at 80.52 pence, off a three-week high of 81.00 reached on Monday. The single currency faces strong chart resistance at the mid-September peak of 81.14 pence and the 200-day moving average at 81.18 pence.
Traders cited talk of demand for sterling against the euro by a UK corporate earlier in the session and which offered support to the pound.
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