Euro little changed in London

The euro was little changed against the dollar on Thursday after the European Central Bank stood pat on rates as widely expected, but fell against sterling which surged after the UK central bank cut rates by 50 basis points, also as expected.
ECB President Jean-Claude Trichet had flagged that no rate move would happen at this meeting but hinted the central bank may resume its monetary easing cycle in March, and markets will be looking for clues as to the size of the next move. Trichet will hold a news conference at 1330 GMT.
The BoE's rate decision put UK interest rates at 1.0 percent, compared with eurozone rates at 2.0 percent. "If the BoE has got to the bottom of its rate cutting cycle and there's still room and expectation that the ECB will cut further, then interest rate spreads will be reduced in terms of the negative spread versus sterling," said Rabobank strategist Jeremy Stretch.
At 1258 GMT, the euro was up 0.1 percent against the dollar at $1.2844, but eased from $1.2858 just before the ECB's decision. The euro shed gains against the yen at 115.08 yen while it was down more than one percent against sterling at 87.72 pence, almost a two-month low.
Sterling jumped to a 2-week high versus the dollar after the BoE's rate cut to a record low of 1 percent, as expected. 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.
"The cut in the bank rate was fully factored in and the accompanying statement gives few clues as to the future path of interest rates so the market will be waiting for the inflation report next week," said Philip Shaw, chief economist at Investec.
"There had been talk of a more aggressive move and perhaps the small bounce in sterling is on the back of that. But given the volatility of FX markets recently, it's a relatively small reaction," he added. Data on Thursday showed German manufacturing orders suffering their fourth sharp drop in succession in December, falling by 6.9 percent month-on-month.
A Reuters poll on Thursday showed the euro little changed against the dollar this year, but at least one more interest rate cut and a fragmented European response to the financial crisis could yet see it tumble further. Traders said the euro also remained vulnerable to credit woes in Russia and eastern Europe.
Russia said on Thursday it would increase stakes in state banks in coming months. On Wednesday, rating firm Fitch downgraded Russia's sovereign ratings while Kazakhstan central bank's decided to devalue its currency. "The euro has massive problems given the region's association with eastern European emerging markets as there are big Italian and German banks with large exposure there," IDEAglobal currency strategist Maurice Pomery said.
The dollar rose 0.1 percent to 89.64 yen. Looking forward, investors are watching key US non-farm payrolls data on Friday, expected to show ongoing deterioration in the labour market of the world's largest economy. Ahead of this, market participants will be eyeing Thursday's weekly jobless claims and productivity figures at 1330 GMT, followed by durable goods statistics.