LONDON: Sterling inched up from lows against the dollar on Tuesday on technical factors and buying by large Swiss investors, but analysts said it would run out of steam again as chances of more monetary stimulus in the UK grow.
The pound was up 0.1 percent at $1.5704, bouncing from its eight-month low of $1.5632 struck on Monday. Traders cited offers at $1.5725 and then at $1.5750, with support near its recent lows.
Traders said sterling appeared oversold on daily momentum charts, helping it benefit from an unwinding of short positions.
"Despite yesterday's lows we could well see a rebound, which could well be triggered by a close beyond $1.5780," said Michael Hewson, market analyst at CMC.
He added that sterling could still fall towards $1.5485 -- the 50 percent retracement of the low of $1.4230 struck on May 20, 2010 to its rise to $1.6745 in late April 2011 -- "but we could get a sharp short squeeze first."
The pound also moved higher against the euro, which was marginally lower at 87.12 pence, hovering near Tuesday's 200-day moving average of 87.03 pence.
The common currency came under fresh pressure on Tuesday after Standard and Poor's cut its debt rating on Italy and on persistent worries about the euro zone banking sector, though European stocks rose on technical factors.
The dollar and the yen have made sizeable gains in recent sessions as worries about contagion from the euro zone debt crisis and concerns about slowing global growth drove investors to unwind exposure to riskier assets and high-yielding currencies.
"Sterling is still a high-beta currency with the UK having a good deal of exposure to the euro zone," said Raghav Subbarao, currency analyst at Barclays Capital.
Speculation that Bank of England minutes, due on Wednesday, will indicate more policymakers are considering further quantitative easing, which would expand the BoE's balance sheet and would be seen as negative for the UK currency.
Investors have been starting to price in such a move as recent comments from policymakers appear to signal they are increasingly ready to vote for further monetary stimulus to boost lacklustre UK economic growth.
"While our base case scenario is that the BoE will not resort to QE, the probability has nonetheless increased in the past few weeks," said Barcap's Subbarao.
"If the MPC resorts to more QE, sterling will weaken. There is a difference when the Fed opted for QE1 as investors still preferred to hold the dollar for liquidity. That cannot be said to be the case for sterling, and therefore more QE will lead to a weaker pound."
The dollar, in contrast, has been buoyed by expectations the Federal Reserve will resort to 'Operation Twist' to boost the flagging US economy -- not boosting its balance sheet but seeking instead to keep rates at the long end lower by purchasing longer-dated Treasuries and selling short-dated bonds.
Copyright Reuters, 2011
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