Sterling fell against the euro on Tuesday after a key Bank of England policymaker struck a more dovish tone and forced some short term investors to reverse bullish bets built up in the past few days. BoE policymaker Paul Fisher flagged the chances of more quantitative easing in the UK while public finance data painted a rather dismal picture of UK's fiscal position. Fisher said Britain's economic recovery remained fragile and more monetary stimulus could be required if deflation risks mount.
His comments persuaded some Russian investors, speculators and sovereign accounts to sell the pound, traders said. The common currency was last at 88.62 pence, up 0.4 percent on the day, having recovered from a brief dip caused by a German economic sentiment survey that raised concerns about the eurozone's largest economy. "Fisher's comments have led to a sell off and it is fair to say that he was more dovish than BOE Governor (Mervyn) King," said Christian Lawrence, FX strategist at RBC Capital Markets.
Against the dollar, sterling was marginally higher at $1.1622, after having dived to a session low of $1.6167 on Fisher's comments. Cable tracked gains in euro/dollar which rose on growing market optimism the newly reshuffled Greek cabinet would survive a vote of confidence, due to be held around 2300 GMT. Such a result could help avert a default on the country's debt and could give a fillip to risk sentiment.
Sterling has suffered in recent weeks from UK data being on the soft side as the country enters a long period of drastic fiscal tightening. Data on Tuesday showed Britain ran up a record budget deficit in the first two months of the fiscal year and analysts said slowing economic growth would pose a challenge to the government as it tries to slash borrowings.