Sterling weakened on Thursday, retreating from one-month highs against the dollar and euro after UK retail sales undershot forecasts and a Bank of England policymaker said quantitative easing could be extended if necessary. The September retail sales figures and BoE Deputy Governor Paul Tucker's comments were enough to push sterling briefly below $1.65 and pull the euro up further from 90 pence.
But the weight of bets already in place against sterling in a market still broadly bearish on the currency meant its fall shallower than it might otherwise have been, analysts said. "The most important thing was retail sales but we shouldn't over-respond," said Paul Robinson, currency strategist at Barclays Capital in London, noting that retail sales are often volatile, and the annual increase was still above 2 percent.
"The market is still heavily short. So all else equal, good news should have a greater effect (on the pound) than bad news," he said, noting that sterling regained most of its losses against the dollar as the afternoon progressed. At 1430 GMT sterling was down a quarter of a percent on the day at $1.6565, having fallen as low as $1.6488 after the retail sales data. Earlier on Thursday it matched Wednesday's one-month high of $1.6638.
Traded volume in "cable" on Reuters Matching surged in the hour around Tucker's comments and the retail sales release, nudging 2,500 trades, the highest in a single hour for a month. The euro was up 0.1 percent on the day at 90.50 pence, having risen as high as 90.77 pence earlier. On Wednesday it fell more than 1.2 percent on the day to 89.98 pence, its weakest since late last month.
Trade-weighted sterling fixed lower at 80.30, down from Wednesday's one-month high of 80.60 and its first fall in 10 days. Some analysts reckon the sluggish lending and demand for credit, together with a bleak outlook for the public finances means sterling's upside should be limited.
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