Sterling skidded over 1 percent against the euro on Wednesday after the head of the European Central Bank said it was too early to decide on further stimulus in the euro zone. The euro had hit a one-month low versus the pound the previous day on talk the ECB would beef up its 1 trillion euro plus asset-buying programme. But it gained 1.2 percent on Monday, its biggest one-day rise since late August, to trade at 73.26 pence.
Speaking to the European Parliament in Brussels, ECB chief Mario Draghi said an emerging market slowdown had increased the risks to European inflation and growth, but that the central bank needed more time to decide on its response. "Everyone had got very excited about him saying something (on further stimulus) but ... it's quite clear that it just wasn't the forum for him to do that," said Ian Gunner, manager of the Altana Hard Currency Fund in London.
"The points that were made at the ECB meeting that were seen as dovish are still valid: they are on watch, they're monitoring things, and if they feel that the risks that they've identified go on to meaningfully affect their forecasts, that could change their policy." Against the dollar, sterling traded as low as $1.5221 its lowest in over two weeks, having been hurt by data on Tuesday that showed Britain's public finances deteriorated last month, while industrial orders also declined.
In contrast to the euro zone, where monetary policy is expected to remain ultra-loose and perhaps become looser, investors are betting UK interest rates will start to rise around the middle of next year. But most analysts reckon the Bank of England will wait until the US Federal Reserve moves. "On balance, while we expect still superior UK growth prospects to lead sterling higher against the euro, we expect, sterling/dollar to trend lower with the euro/dollar," Barclays analysts said in a note. British gilt yields rose along with other major government bonds, helped by a rally in riskier assets like stocks. The 10-year gilt yield was last up 2.5 basis points on the day at 1.81 percent.5.
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