Sterling fell to a one-month low against the euro and weakened against the dollar on Monday, after a senior Bank of England policymaker said further gains by the pound would be unwelcome. Speaking to local businesses in Darlington, BoE deputy governor Charlie Bean said Britain would find it harder to build an export-based recovery if sterling rose any more. The currency exchange rate is not problem, he said, but anything stronger would delay a rate rise.
Sterling has risen for the past three quarters on a trade-weighted basis, as investors priced in chances that the BoE would tighten monetary policy in the spring of 2015 if economic data out of the UK remains solid. But the pound has steadily lost ground against the euro since late last week, after the European Central Bank signalled it would not ease monetary policy soon. Many investors were expecting ECB and BoE policies to diverge, with the ECB easing policy and BoE tightening.
Investors are turning increasingly bullish towards the euro and cutting short euro/long sterling positions after ECB chief Mario Draghi said last week that economic conditions in the region did not require a further loosening of policy. The euro was up 0.5 percent at 83.45 pence, extending gains into a third straight session and trading at levels seen a month ago. Volumes picked up on the Reuters Dealing platform, with traded activity at 31 percent above its one-month average, according to Thomson Reuters data.
Sterling's drop from recent one-year highs against the euro was likely to prompt importers to hedge against more losses. "UK importers may be running out of time to take advantage of recent highs," said Tiffany Burk, senior European market analyst at Western Union. "The ECB's press conference reflected a far more positive outlook than many expected, allowing the euro to claw back significant ground against the pound."
In the options market, risk reversals - a gauge of demand for options betting on a currency rising or falling - show less bias towards sterling strength against the euro in the coming four weeks. Sterling fell against the dollar, trading 0.4 percent lower at $1.6640, dragged down by Bean's comments. The dollar was also supported by Friday's payrolls data, which showed US employers added a robust 175,000 jobs to the market last month. That kept alive expectations of further stimulus withdrawal in coming months.
"Sterling at $1.67-1.68 makes you wonder how much more can it go up," said Howard Jones, partner at RMG Wealth Management. "Any disappointment in UK data could see sterling drop back towards $1.65."
Traders said any drop towards $1.65 is likely to be a buying opportunity for investors who are expecting the British economic recovery to shift to a more sustainable footing. Speculators added to bullish bets on the pound in the week to March 4, according to data from the Commodity Futures Trading Commission released on Friday. On Tuesday, industrial output data for January will be released and a private-sector survey of British retailing will be released overnight. Both will give indications on how demand in the economy is holding up.
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