Sterling hit a 22-month high against the euro on Thursday, before retreating slightly, as traders wagered on an increasingly divergent monetary outlook between Britain and the euro zone.
Traders are betting the Bank of England will tighten monetary policy before the European Central Bank. That view has been reinforced by a recent run of soft data from the 18-member monetary union, with German investor morale at a 1-1/2 year low and euro zone inflation languishing at 0.5 percent.
Markets have been speculating on whether the central bank will loosen monetary further this year in the euro zone, where interest rates were slashed to record lows last month. But ECB policymaker Ardo Hansson said on Thursday that quantitative easing was not needed right now. Sterling hit the 22-month high against the euro of 78.89 pence per euro on Thursday before edging down. The single currency was up 0.2 percent on the day, last trading at 79.09 pence, as the sell off took a pause.
Against the dollar, the pound edged down 0.2 percent and was last trading at $1.7105, retreating from an almost six-year high of $1.7192 hit on Tuesday. Western Union analyst Nawaz Ali said that move was largely down to fresh concerns over the Ukraine crisis, after the United States imposed its toughest sanctions yet on Russia, driving investors to seek out safe-haven currencies such as the yen, Swiss franc and dollar.
Data released on Wednesday showing weak UK wage growth would do little to dent confidence in the pound, Ali said. "The bigger picture hasn't changed. It's still looking very positive for the UK economy and therefore bullish for the British pound and I would expect next week's GDP data to add to that story." Sterling has surged over the past year as Britain's economy has shown signs of a strengthening recovery, fuelling expectations that the BoE will hike interest rates before the year's end. The currency has gained almost 15 percent against the dollar and almost 10 percent against the euro over the year.
But while it has gained more against the dollar, more than half of the pound's gains against the single currency have come in the last four months. "There is concern about euro zone equity markets, there is concern about the overall economy, so the obvious focus now is for people to buy sterling against the euro," said Neil Mellor, a currency strategist at the Bank of New York Mellon.
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