Sterling rose to a five-week high against the euro on Thursday after European Central Bank chief Mario Draghi affirmed the bank's balance sheet will be expanded to 2012 levels and emphasised ECB policymakers were unanimous in backing further easing measures.
After a Reuters report that some national central bankers in the euro area would challenge Draghi over what they saw as his secretive management style and erratic communication, there was talk that he might be losing support for more measures like sovereign bond purchases. But his latest comments suggest the ECB's governing council is committed to further easing measures, including using additional unconventional measures, if needed.
On a day when the Bank of England kept interest rates unchanged at a record low of 0.5 percent, Draghi's dovish message led to a drop in the euro across the board. It hit a five-week low of 77.99 British pence and dropped to $1.2393 against the dollar, its lowest in more than two years. "Draghi likely alleviated concerns that he may struggle to successfully lead the governing council to implement more aggressive measures," said Valentin Marinov, currency analyst at Citi.
Earlier, the BoE concluded a two-day meeting and kept rates unchanged, as expected. But attention is turning to economic projections the Bank is due to publish on November 12 in its quarterly Inflation Report. Those projections are likely to reflect concern that has grown over Britain's fast-recovering economy since the BoE's last quarterly forecasts, in August.
The BoE is likely to be cautious given growing doubts over the euro zone recovery. The euro zone is Britain's biggest trading partner, and slowing growth there could hurt exports and prompt the BoE to keep interest rates lower for longer. Earlier this year, speculation was widespread that the BoE would be the first major central bank to raise interest rates in November. Those expectations are dwindling as inflation remains subdued, economic activity moderates and wage growth lags.
Expectations for higher rates have been pushed out to the second half of next year , and a more dovish message from the BoE next week in its Inflation Report is likely to put pressure on the pound, especially against the dollar. Sterling has dropped more than 7 percent from the six-year highs of around $1.72 struck in July, to trade at $1.5906 on Thursday. It struck a one-year low of $1.5869 on Wednesday after a report showed UK services grew at a much slower pace than expected in October.
Data on Thursday showed output from industry rose 0.6 percent in September from August, the Office for National Statistics said, beating a Reuters poll forecast for growth of 0.4 percent. But doubts over the recovery remain after surveys of UK service businesses and manufacturing sectors released earlier this week added to worries about an economic slowdown.
In addition, data released by mortgage lender Halifax on Thursday showed British house prices unexpectedly fell last month and recorded their smallest quarterly increase in nearly two years, adding to signs that the market is cooling. A steady decline in house prices could hurt consumer confidence and spending in coming months, some analysts said. "Sterling bulls have suffered a significant setback in recent months," said Jane Foley, senior currency strategist at Rabobank. "While we expect it to trade mostly in a $1.59 to $1.61 range in the coming months, we do expect the pound to outperform the euro and look for a gradual move to 76 pence on a 12-month view."
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