Sterling outperforms euro

Sterling rose against the euro for a fourth straight day on Thursday as weaker-than-forecast German inflation contrasted with Britain's solid recovery. But the pound made little progress against the dollar, with growing geopolitical tension driving investors into safe-haven assets and the most liquid currencies. Ukraine said on Thursday any movement by the Russian military in Crimea outside the Russian Black Sea fleet's base in Sevastopol would be regarded as an act of aggression.
The euro was down 0.1 percent against the pound at 81.98 pence, having briefly fallen below 82 pence to its lowest since February 18 after German inflation came in below forecasts. Investor focus will now be on euro zone inflation data for February, due at 1000 GMT on Friday, for clues as to the European Central Bank's next move.
"What's pushed (the euro) below 82 has been weaker German CPI. Tomorrow, if that pushes euro zone inflation lower, then we could see a knee-jerk reaction (in euro-sterling)," said Kathleen Brooks, the research director at Forex.com. She pointed to a major support level for euro-sterling at 81.57. "If it goes below that, then we're going back to two-year lows," she said. Against the dollar, sterling recovered early losses to trade marginally higher at $1.6676, with near term support seen at $1.6583 - the low struck on February 24. It had briefly jumped to above $1.6700 on Wednesday after British gross domestic product data confirmed a broad-based recovery and cemented expectations of a rate hike in the spring of 2015.
"We favour euro/sterling turning lower to 81.60/70 pence," said Chris Turner, head of currency strategy at ING. Sterling was the best-performing major currency of the second half of 2013 and it has extended that run this year, based on speculation that an improving economy may prompt the Bank of England to raise interest rates early in 2015.
Sterling overnight interbank money market rates indicate the chances of a rate hike have been rising in recent days, and on Thursday implied the chance of a rise in 15 months' time. Ben Broadbent, a member of the BoE's Monetary Policy Committee, said on Wednesday that the strength of the pound reflected the fact that other economies, particularly elsewhere in Europe, have not grown much.
"As a consequence of firmer data the market appears to be gearing up for an eventual rate hike, with BoE members sounding more upbeat, even if it is unlikely to occur any time soon," analysts at Credit Agricole said in a note. "Consequently, over the near term the pound looks well supported, although eventually we expect the currency to settle back to earth. In particular, three-month interest rate differentials with the dollar appear to suggest that sterling/dollar gains are overdone."