Sterling inched up against the euro on Thursday after European Central Bank President Mario Draghi said fundamentals favoured a weaker euro and stressed the effect of geopolitical tensions on the euro zone. Speaking after a meeting where the central bank kept its benchmark interest rate at 0.15 percent, Draghi said the ECB would "monitor the repercussions of heightened political risk and exchange rate developments," and confirmed monetary policy in the euro zone and United States would continue to diverge.
Draghi did not announce any new stimulus, though he did stress that the ECB was ready to resort to quantitative easing - effectively printing money to buy securities - if the outlook for inflation fell further. The euro hit a low for the day of 79.25 pence after the news conference from around 79.44 pence when it started, down 0.2 percent on the day.
"The thing that (Draghi) did do which may have significance was that he did slightly talk down the euro - that supports a lower euro going forward," said Kathleen Brooks, research director at Forex.com. "He talked about divergent monetary policy paths ... He was confirming that he is going to stick on that dovish path." Earlier on Thursday, the Bank of England also kept its benchmark interest rate at its record low of 0.5 percent, as expected.
The BoE's Monetary Policy Committee finished its latest two-day meeting today, but markets will have to wait for another two weeks to find out whether any of the nine members voted for an interest rate rise. Some analysts believe a dissenting voice was possible and would point the way to the first rise in interest rates in seven years. "Whatever way the economic data has been going, we've been stuck at about a 50 percent probability of a rate hike by the end of the year, and that's not really budged (since) the huge re-rating we had after the Mansion House speech," said Adam Cole, global head of currency strategy at RBC Capital Markets, referring to a speech by BoE Governor Mark Carney in June.
"Whether that 50 jumps up to 100 or drops back towards zero will be the determinant of where sterling goes." Data released on Thursday showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to a further strengthening of the US labour market. The figures add to a recent run of strong US data, which has helped to drive the greenback up almost 2 percent since mid-July, when the pound hit a near-six-year high against the dollar.
Sterling weakened by 0.1 percent against the dollar on Thursday to trade at $1.6841. British government bond prices were little changed on the day, with 10-year yields steady at 2.52 percent after touching a fresh one-year low of 2.493 percent earlier in the day. The fall in the US jobless claims caused gilts to lose early gains, which had pushed 30-year yields to their lowest since May 2013 at 3.173 percent. Gilt prices underperformed German government debt, with the spread between 10-year yields rising as high as 143.6 basis points, 3 basis points wider on the day and a level last seen on August 1.
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