Sterling edged down against the dollar bur hovered near a five-week high versus the euro on Friday, as the prospect of full-scale quantitative easing in the euro zone looked all but certain. Reuters reported on Friday that European Central Bank officials were considering ways to ensure weak countries that stand to gain most from money-printing bear more of the risk and cost, fuelling speculation that QE is imminent and helping drive the euro close to a 28-month low against the dollar.
Against the pound, the euro fell to as low as 78.315 pence, its weakest since November 12. It was last trading flat at 78.445 pence, a day after posting its biggest daily losses against sterling since February. In contrast to the ECB, where a sovereign-bond-buying programme could start as early as January to shore up the faltering euro zone economy, the US Federal Reserve signalled on Wednesday that it is on track to start raising interest rates next year.
"The monetary policy divergence story has become more evident again following the Fed meeting ealier this week," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "The view in the market seems to be that if the Fed starts to raise rates, the Bank of England will be more comfortable raising rates as well." Against the dollar, sterling was down 0.2 percent at $1.5641, staying close to a 15-month low of $1.5539 hit earlier in the week.
Phyllis Papadavid, a currency strategist with BNP Paribas in London, said she saw the pound trading around $1.53-$1.56 over the next few months. Diminishing expectations the BoE will raise interest rates soon have been at the heart of sterling's fall against the dollar since July. And concern over next May's parliamentary elections looks set to weigh increasingly on the currency in 2015.
Polls suggest neither major party may be able to put together a majority coalition. Depending on who eventually wins power, a referendum on whether to leave the European Union may follow. "I expect things to calm down into Christmas now," said one London-based dealer. "We will probably see a ramping up of the political talk in the new year, which clearly carries some risks."