Sterling rose against the euro on Thursday, recovering from losses after European Central Bank chief Mario Draghi flagged downside risks to the euro zone economy and inflation and kept the door open for more quantitative easing. Draghi's dovish stance was a contrast to BoE Governor Mark Carney, who said on Saturday that while a slowdown in China's economy could push down inflation further, it did not change, for now, the Bank of England's position on when and how it might raise interest rates.
Sterling, however, lagged the dollar, falling to a three-month low after Britain's dominant services sector grew at its weakest pace in more than two years in August, adding to uncertainty over when the Bank of England can raise rates. The Markit/CIPS Purchasing Managers' Index (PMI) for services dropped in August to its lowest since May 2013 at 55.6, down from 57.4 in July. That was well below economists' forecasts of 57.6.
Markit added Britain's overall economic growth rate was likely to slow to 0.5 percent in the three months to September from 0.7 percent in the second quarter. Sterling hit a low of $1.5235, having traded at $1.5263 before the data was released. It was at $1.5256 in afternoon trade, down 0.3 percent on the day.
The euro inched up to 73.65 pence immediately after the data was released, compared with 73.60 beforehand, before giving up all those gains to trade at 72.85 pence, down 0.7 percent on the day, after Draghi's comments at the press conference. "Draghi said there remain external risks to the economy," said Alex Edwards, currency analyst at UKForex. "This should hardly be a surprise, given recent turmoil in China and the wider impact on stock markets. There have been some fairly large long positions building in euro/dollar and euro/sterling over the last week, so his comments have provided a good trigger to reverse these trades."
In Britain, the soft services sector survey came a day after data showed the construction sector grew at a weaker-than-expected pace, while the manufacturing sector PMI survey also missed expectations. "The overall weaker set of August purchasing managers' surveys for services, manufacturing and construction will likely fuel belief that the BoE will not be raising interest rates until well into 2016," said Howard Archer, chief UK and European economist at IHS Global.
Sterling has lost more than 3 percent on a trade-weighted basis in the last two weeks alone as investors have pushed back the timing of the first rate hike, given renewed market ructions and worries about a China-led global slowdown. The earliest sterling money markets expect the BoE to move is around March/April next year.
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