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Sterling hit a one-month high against a softer dollar on Wednesday as perceived riskier currencies were bolstered by expectations of more easing by the US Federal Reserve. It recouped sharp losses made after the dovish minutes from the last meeting of Bank of England's monetary policy committee which clearly signalled more quantitative easing was on the way in the UK.
UK retail sales data, out on Thursday, should also attract attention, although analysts said price action was more likely to be dominated by the Fed decision in the near term. Sterling was up 0.1 percent to $1.5735, having risen to $1.5778-its highest level since May 22-and well above a session low of $1.5651 struck soon after the release of Bank of England minutes with some Asian central bank buying.
The euro was flat against sterling at 80.69 pence. Traders cited offers at 81 pence which would curtail gains in the near term while bids were reported under 80.25 pence. "If today's QE indicators didn't hurt it too much against the dollar then maybe retail sales wouldn't either. I think more of a risk to cable is this evening's Fed decision," said Richard Driver, a currency strategist at Caxton.
Investors who are piling on to riskier currencies including sterling could face disappointment if the Fed refrains from announcing another round of QE and instead extends "Operation Twist", a programme aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones. In that scenario the dollar could rebound broadly.
Minutes to the BoE's June meeting showed far stronger support for more quantitative easing than many economists had expected, but markets were already primed for such a scenario after a speech by governor Mervyn King last week. The latest minutes showed four policymakers including King voted to increase the 325 billion pound total QE asset purchase programme, compared to just one in May.

Copyright Reuters, 2012

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