Sterling hit a two-week high against the dollar on Wednesday after Britain's finance minister did not use his budget to give as much leeway to the Bank of England to stimulate growth as some market players had anticipated. Minutes from the latest BoE policy meeting, showing less support than expected for further asset purchases, also lifted the pound as investors who had bet against the currency were forced to cover their short positions.
The pound rose to a peak of $1.5187, its highest since early March, before paring gains to last trade up 0.4 percent on the day at $1.5163. Strategists said sterling's bounce could be short-lived, however. Although some investors were disappointed after finance minister George Osborne kept the BoE's inflation target at 2 percent, his updated remit for the central bank was supportive of unconventional policy measures.
That could pave the way for more aggressive monetary easing, despite sticky inflation, when new governor Mark Carney takes over in July. "Sterling has rebounded on this news but it's a bit of a knee-jerk reaction. The fact they have emphasised the flexibility available within the current regime should allow the BoE to continue to provide this very accommodative policy," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"That will allow sterling to come back under pressure." Stannard said the pound may test resistance around the February 28 high of $1.5223, but investors should use that as a selling opportunity.
Osborne also used the budget to halve this year's growth forecast, adding to deep concerns about the faltering British economy that helped push sterling to a more than 2-1/2 year low of $1.4832 last week. The euro edged up 0.1 percent to 85.40 pence, holding within sight of a five-week low of 85.055 pence struck on Tuesday on concerns the financial crisis in Cyprus could impact the broader euro zone.
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