Sterling hit a 2-1/2 month high against the euro on Thursday, with worries about the eurozone debt crisis and rising Spanish borrowing costs outweighing a drop in UK factory output. Bank of England policymakers voted to keep interest rates on hold at 0.5 percent and the quantitative easing total unchanged at 325 billion pounds.
The unchanged policy course was widely anticipated by the market and meant investors were more focused on developments in the eurozone. Concerns about Spain's ability to meet its budget targets sent the Spanish yield spread over German Bunds to its widest level since November.
The euro hit a session trough of 82.38 pence, its lowest level since January, with strong support seen around the January 9 low of 82.22 pence. There was significant buying interest from companies reported around 82.00 pence. "In the last couple of days with Spanish bond yields rising people have tried to express that through euro/sterling and now we are heading towards the January lows," said Daragh Maher, HSBC currency strategist.
A break through those lows would open up a test of the August 2010 trough of 81.43 pence, but Maher said euro/sterling would struggle to break 82.22 pence unless euro/dollar also fell below $1.30. The dollar has rallied broadly this week after minutes from the Federal Reserve's March meeting on Tuesday showed only two of the 10 policy-setting committee members saw the case for additional monetary stimulus in the light of an improving economy.
On Thursday the greenback was also boosted by a government report showing US jobless claims fell to the lowest level in four years. The pound fell 0.4 percent to $1.5824, triggering reported stops below the 200-day average at $1.5848. The BoE's current asset purchase programme finishes in May and market players would be looking for any signs that policymakers are considering extending the programme, with some economists forecasting an extra 25 billion pounds of QE.
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