Sterling hits 5-1/2 month low against dollar

Sterling hit a 5-1/2 month low against the dollar on Tuesday as caution before a Bank of England meeting and testimony from incoming governor Mark Carney later in the week offset better-than-expected UK services data. The pound dropped 0.6 percent on the day to $1.5652. Traders said falls were partly driven by its drop against a broadly firmer euro.
The euro climbed 1 percent on the day to 86.55 pence, buoyed by above-forecast euro zone PMI data which edged it closer to last week's 15-month high of 87.17 pence. A strong rise in UK retail sales in January also helped lift the pound in early trade to a session high of $1.5805, but strategists said many investors were still focused on the overall gloomy outlook for the UK economy.
"Maybe the market is just so down on the UK it prefers not to buy into any positive UK data," said Tom Levinson, FX strategist at ING. "There's probably some nervousness as well about this Thursday. The market may be slightly concerned Carney will suggest more radical measures and any dovish orientation may be more bearish for sterling." Sterling has fallen heavily in recent weeks after data showed the economy contracted in the final quarter of 2012. Although the services PMI data helped alleviate some of those concerns, many investors are still worried Britain could slip into its third recession in four years.
Incoming governor Mark Carney, who takes the helm in July, will testify to a parliamentary committee on Thursday, the same day as the Bank of England's next policy meeting. Traders said concerns about the economy have prompted some marginal talk that the central bank could opt for further quantitative easing to stimulate growth, even though the consensus forecast is for them to keep rates and QE on hold.
Strategists said many investors would be wary of buying the pound before Thursday. "There's a lot of focus on Carney and interest in whether there will be a shake up in July and whether he will lean towards more QE, which would be another downside risk for sterling," said Caxton FX currency strategist Richard Driver. Quantitative easing involves printing money to buy bonds and tends to weigh on a currency by increasing its supply. Nomura FX strategist Saeed Amen said sterling could gain some support and climb towards $1.58 if Carney is not as dovish as some market players are expecting.