Sterling was steady on Tuesday, trading near a four-week high against the dollar, on expectations that UK growth numbers due this week will point to a sustained recovery. The pound was also helped by a slight narrowing of spreads between 10-year US Treasuries and UK gilt yields on reduced expectations that the Federal Reserve will start withdrawing monetary stimulus in the short term.
The spread had been at its widest in seven years late last week, giving the dollar a boost. Traders were, however, unwilling to get aggressively long with the Bank of England likely to keep monetary policy loose despite improving data. The pound traded at $1.5350, having hit a high of $1.5385 on Monday which was its highest since June 26. The euro was slightly higher against sterling at 85.90 pence with most investors on the sidelines before flash euro zone purchasing managers' index (PMI) surveys on Wednesday.
In the UK, data on Thursday is forecast to show the economy grew 0.6 percent in the second quarter from the previous quarter and 1.4 percent on the year. "Q2 GDP data will illustrate whether the economy really is improving," said Antje Praefcke, currency strategist at Commerzbank.
"Until then sterling might well be able to defend its gains, as long as the risk-on sentiment continues. Short term cable longs might therefore be interesting because, with $1.5350 taken out, there is now scope as far as $1.5480." Above-forecast June retail sales, improving labour market conditions and Bank of England minutes unexpectedly showing all nine rate-setters opposed to more stimulus, have helped the pound in the past few sessions.
"We think that despite improving data, sterling remains a big sell," said Peter Frank, currency strategist at BBVA. "The problem for sterling is that the recovery is both tentative and unbalanced," he said, adding that the Bank of England will have to support the economy through more stimulus. BBVA expects sterling to end 2013 at $1.4530.
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