Sterling fell sharply to its lowest in three weeks against the euro on Thursday after the European Central Bank defied expectations of monetary easing and drove investors who had gone short on the common currency to buy it back. Money market rates in the euro zone rose while the yield differentials between two-year German and British gilts narrowed as Bund yields rose faster than their UK counterparts.
Earlier in the day, Bank of England kept rates on hold and its asset purchase programme unchanged on Thursday. Investors, though, are still pricing in the chance of a first rate hike in the spring of 2015. The euro rose 0.9 percent to 82.875 pence, its highest level since February 12, and on track for its biggest one-day gain since early February. In the options market, short term risk reversals - a gauge of demand for options betting on a currency rising or falling - showed a lesser bias for euro weakness against sterling in coming weeks. "The euro has risen because of the ECB, but we do not think that the euro can hold gains against sterling," said Sasha Nugent, analyst at Caxton FX. "Prolonged low inflation remains a problem in the euro zone while in the UK, strong data is likely to keep sterling on the front foot."
Against the dollar, sterling was slightly higher at $1.6737, not far from a four-year high of $1.6823 struck in the middle of February. Data from mortgage lender Halifax on Thursday showed British house prices soared in February at the fastest monthly pace since May 2009. That came a day after a buoyant survey of the services sector kept expectations alive that the British economy is on a robust recovery path while the euro zone economy is witnessing sluggish growth and disinflation. But ECB chief Mario Draghi told a news conference that the latest information suggested that a recovery was on track and there was no need for further action.
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