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Sterling rallied on Friday as investors cut bearish bets ahead of the Greek election while some cheered UK policymakers' pre-emptive move to cushion the economy from the euro crisis. Traders said the British pound drew support from the belief that the Swiss National Bank was recycling euros in its foreign exchange reserves into sterling.
The SNB has stepped up its intervention by purchasing large amounts of euros to protect the cap on the Swiss franc, currently pegged at 1.20 francs. Sterling rose to a two-week high against the US dollar, up 0.5 percent on the day at $1.5630, rising past reported stop-loss orders above $1.5601 to its highest level since May 30. The euro fell 0.5 percent to 80.75 pence.
The dollar also came under broad pressure as weak US data bolstered expectations of more easing by the Federal Reserve.
The pound had earlier come under pressure after the Bank of England announced an emergency liquidity package to support the banking system and Governor Mervyn King suggested more easing could be on its way. But it pared those losses with UK bank stocks reacting positively to the announcements. "I think sterling will stick to its recent trading range. The BoE and Fed are both on the unrelenting path of money printing and when one seems to have calmed down, the other one starts again," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
Next week sterling could be vulnerable to the minutes from the latest Bank of England policy meeting, out on Wednesday, which could give indications policymakers are leaning towards further stimulus to bolster UK growth. UK consumer prices and retail sales for May, due out on Tuesday and Thursday respectively, could add to speculation about another round of asset purchases.
Nevertheless, the BoE's move on Thursday to prevent the rapidly deteriorating eurozone crisis pushing the UK economy into an even deeper recession was expected to help sterling eke out gains against the euro in the next few weeks.

Copyright Reuters, 2012

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