Sterling fell against the dollar and the euro on Monday as investors and speculators remained cautious about the Britain's economic outlook and on prospects of further easing by the Bank of England. The dollar was helped by its gains against the yen after the Bank of Japan began buying government bonds as part of its aggressive stimulus policy to fight deflation which drove the Japanese currency lower across the board.
Sterling was trading down 0.4 percent against the dollar at $1.5274, inching further away from $1.5364, its highest since February 20, hit on Friday after poor US jobs data that weighed on the dollar. Traders cited stop-loss sell orders at $1.5350, which could act as near-term resistance.
Analysts said any gains in sterling would be fleeting as markets still saw little reason to invest in it aggressively, given the British economy's dismal performance and threat of another recession. "We see a weak pound in coming months as the British economy is lagging and will find it difficult to avoid recession in the first quarter," said Lydia Kranner, FX strategist at RZB. "The BoE might opt for measures to ease policy to help the economy and this could hurt sterling."
Data released last week showed currency speculators continued to bet against sterling, while bets in favour of the dollar swelled to their highest level in nine months. The euro was up 0.6 percent against sterling at 85.17 pence, holding well above the 2-1/2 month low of 84.115 pence, hit on April 1. Japanese investors looking for higher-yielding assets opted for euro zone bonds, which lead to sharp fall in borrowing costs in Italy and Spain, and helped support the euro.
Analysts said sterling could see some support from safe-haven flows if the economic or political situation in the euro zone took a turn for the worse. "If the euro zone fears come back then sterling tends to do relatively well at the back of it, that could be one of the redeeming factors for the pound," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec. Sterling was up 1.0 percent on the day at 151.12 yen. It had hit 151.78 yen earlier in the day which was its highest level since late October 2009.
Sterling could see considerable losses if the BoE opts to expand its asset purchase programme in an attempt to prevent its economy from slipping into its third recession in less than five years. The BoE opted to keep interest rates and its quantitative easing programme on hold last Thursday, but many market players expect further easing from the central bank once new governor Mark Carney takes the helm in July.
Analysts also said the pound could slip if the BoE minutes released next week show any of the Monetary Policy Committee members shifting camp to join the three members who voted for more quantitative easing over the last two months. The risk of Britain losing remaining top-notch credit ratings from two of the three biggest ratings agencies added to sterling's bleak outlook. Standard and Poor's warned Britain on Friday that poor economic performance and slow progress in fixing its budget deficit could cost it its AAA credit rating. While S&P left Britain's rating intact it kept the outlook at negative.
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