Sterling powers up

Sterling hit a near-two month high versus the euro on Thursday, while the pound also jumped against the dollar after the Bank of England cut borrowing costs to a record low - aimed at blunting the impact of a deep recession. BoE policymakers met market expectations, opting to cut British borrowing costs by 50 basis points to 1 percent.
By contrast, the European Central Bank kept euro area rates on hold at 2 percent. The single currency struggled because even though the ECB signalled it may resume cutting, the bank also said zero rates were not appropriate at the moment.
The BoE said in a statement that inflation was set to fall below its 2 percent target by the second half of 2009 but noted that sterling had continued to depreciate, boosting the cost of imports. While the pound's jump reflected investors warming to the rate decision, analysts said underlying nervousness at the state of Britain's financial sector and broader economy remained.
"The economic woes that have paved the way to today's base rate decision will not disappear overnight. So the real question is where do we go from here?" said Trevor Williams, chief economist at Lloyds TSB. "Today's cut means that the UK needs to be ready to face a period where the ability of base rates to be used as a lever on the economy is almost entirely diminished," he added.
By 1538 GMT, the euro had hit its lowest in almost 2 months at 87.33 pence while the pound touched a two-week high of $1.4662, up around a cent and a half from just before the decision. Putting the current sterling rally to one side, economists polled by Reuters expect the pound to continue declining over the next three months against the dollar, having hit a 23-year low around $1.35 last month.
Currency strategists said the euro could see further broad pressure, as the ECB outlined a stark outlook for the currency bloc's economy. "Trichet painted a very bleak assessment of the economy, noting that `we continue to see persistent weakness in economic activity in the euro area'," said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman in a note to clients.
The pound has traded in a highly volatile fashion so far this week, whipped around by a variety of influences from Moody's downgrade of Barclays to a slightly less bleak outcome than expected from a round of economic data including British service sector numbers.
Housing numbers from the Halifax house price index also surprised to the upside earlier on Thursday, with a rise in prices of 1.9 percent in January. But analysts were sanguine on the outcome, seeing further seepage in the sector. A confluence of factors including soaring job losses and crumbling consumer sentiment meant a half percentage point cut had been fully discounted before the rate decision. Markets are now pricing in a sizeable chance of rates being cut by another 50 basis points in March.