Sterling came close to its highest in three and a half years against the euro on Thursday as an expected decision by the Bank of England to inject more stimulus into the economy was offset by a euro zone rate cut which sparked sharp falls in the euro. The BoE increased asset purchases under its quantitative easing programme by 50 billion pounds in order to aid a flagging economy, sparking relief among some traders who had anticipated a 75 billion pound injection and possibly an interest rate cut.
But attention soon turned to a move by the European Central Bank to reduce its main interest rate by 25 basis points to 0.75 percent and cut its deposit rate to zero in an attempt to revive a deteriorating euro zone economy beset by debt problems. The euro hit a five-week low of 79.65 pence, taking it close to a low of 79.505 reached in mid-May, below which would mark its weakest since the aftermath of the Lehman's collapse in 2008. It was last down 0.6 percent at 79.78 pence.
The euro fell sharply against other major currencies and analysts said the ECB decision may result in the euro vying with the dollar as the currency of choice for funding investments in higher yielding assets. "There was talk the BoE could do 75 billion pounds of QE and with the ECB doing what it did this by default means sterling is more attractive," said Jane Foley, senior currency strategist at Rabobank.
Sterling fell against the dollar, however, losing 0.4 percent to $1.5524. It erased earlier gains after a surprise interest rate cut by China, which came at the same time as the BoE decision, as the ECB later took centre stage. "Of the three (central bank) moves today the ECB's has had the most impact," Rabobank's Foley said. While more quantitative easing is usually seen by the market as negative for sterling, many analysts expect the pound to gain against the euro as worries about Europe's debt crisis offset looser UK monetary policy.
Many also view the BoE's move to ease monetary policy as a pre-emptive one, in contrast to the ECB, on which pressure has been building to announce more stimulus and support a euro zone economy that is on the brink of a recession. "This (BoE) easing is mildly positive for sterling," said Paul Robinson, head of European FX research at Barclays.
"Even though 50 billion was the consensus forecast, quite a few people saw a risk of it being greater than that. Some people were thinking they might cut the actual interest rate for the first time in a long time." The BoE left interest rates at a record low 0.5 percent. However, looser monetary policy and a weak UK economy left the pound struggling against growth-linked currencies like the Australian dollar and the Swedish crown, whose countries' higher interest rates make them more appealing.
The pound dropped to a three-month low against the Australian dollar of A$1.5098 and a two-month low against the Swedish crown of 10.7625 crowns. Data on Wednesday showed the purchasing managers' index for services activity, which accounts for around three quarters of UK output, fell to an eight-month low in June. That followed weak PMI surveys on manufacturing and construction this week and suggested the UK economy may have contracted for a third consecutive quarter in the June quarter.
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