Sterling cuts gains versus dollar, but outperforms euro

Sterling cut gains against the dollar on Tuesday after Bank of England policymakers indicated they were in no hurry to bring an end to their ultra-loose monetary policy stance. But the pound extended gains against the euro for a fourth straight day, as European Central Bank chief Mario Draghi reminded investors that monetary policy would remain accommodative in the recession-hit euro zone where unemployment remained high.
Sterling slipped to $1.5430, off a high of $1.5480 with strong US data also helping the dollar. Still, it held above support at $1.5381, the 55-day moving average, although renewed weakness could see it drop to its June 4 low of $1.5273. The euro fell to 84.80 pence, down 0.3 percent on the day. More losses for the euro could push it towards the June 12 low of 84.64 pence.
"While the dollar has rallied on higher US yields, markets are not looking for a similar policy move in the UK, especially given that some BoE members are still inclined to increase asset purchases," said Mitul Kotecha, global head of FX strategy at Credit Agricole. More asset purchases are considered negative for a currency as it increases its supply. "Indeed, the recent rise in UK gilt yields may embolden the doves on the MPC (Monetary Policy Committee)," Kotecha added.
Outgoing Bank of England chief Mervyn King, a voter for more quantitative easing in the past few months, told lawmakers on Tuesday that unless economic conditions point to a sustainable recovery, monetary stimulus is unlikely to be unwound. Another MPC member, Deputy Governor Charlie Bean, said that a bank rate cut, including taking it to below zero, was also an option. Recent data in Britain, including retail sales on Tuesday have pointed to a modest recovery. That has lessened chances of immediate monetary easing.
Still, the possibility that incoming Bank of England Governor Mark Carney will favour more aggressive easing measures if the economic recovery runs out of steam is making investors wary. "I still think sterling rallies against the dollar should be sold into," said Caxton FX analyst Richard Driver, adding that the pound could fall to $1.52 in the next couple of weeks.