Sterling rallied to its highest in six weeks versus the euro on Tuesday as peripheral debt concerns dogged the common currency, but further gains for the pound were capped ahead of Wednesday's Bank of England inflation report. The euro struggled as worries about a political impasse in Dublin before an important budget vote prompted selling in Irish government debt and expanded the yield spread between 10-year Irish and German bonds to its widest ever.
Portuguese bond yield spreads over German benchmarks also hit new highs on Tuesday. Euro/sterling slipped to a near six-week low of 85.90, before recovering to trade flat at 86.30 by 1619 GMT. Technical analysts said the close below the 38.2 percent retracement of the August to October rally at 86.36 pence on Monday was a bearish sign, with the 200-day moving average at 85.72 seen as support. "The euro is under pressure on peripheral debt concerns but I think it will be difficult to break 85.50," said Jeremy Stretch, head of currency strategy at CIBC.
Sterling fell 0.3 percent to $1.6070, pressured late in London trading due to selling related to bank fixing. Sterling has pulled back somewhat after climbing as high as $1.6300 last week, its highest since late January, but market participants expect it will find support around the psychologically key $1.60.
Investors had been dumping the dollar in anticipation that the Fed would implement more dollar-weakening quantitative easing. But in the aftermath of Fed announcement, focus has turned to fiscal problems plaguing some eurozone countries. As a result, sterling has been boosted both against the dollar and the euro.
Investors awaited the BoE's quarterly inflation report due on Wednesday. King's news conference should give some clue to how seriously policymakers considered following the Fed's lead and expanding the BoE's quantitative easing programme. Market participants said traders may be positioning for an upside in sterling on the inflation report, particularly if it shows price pressures staying high next year.
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