Sterling edged up versus the euro on Thursday as the European Central Bank cut interest rates by 50 basis points, as expected, and as traders anticipated more easing in coming months. But the euro erased some losses against the pound after ECB President Jean-Claude Trichet hinted the next rate move would not be until March.
The ECB cut key interest rates to 2.0 percent, matching its lowest ever rate, and its president said inflation risks continued to diminish as the economy weakened. That prompted traders to sell euro on expectations the ECB will continue its rate easing cycle. However, the euro recouped some losses after Trichet said the next important meeting would be in March as the central bank would have fresh economic forecasts then.
"The possibility that the ECB could leave interest rates unchanged next month is driving the euro higher," said Kathy Lien at GFT Forex. As of 1508 GMT, the euro was down 0.2 percent at 90.17 pence after a session low of 89.54 pence hit shortly after the ECB decision was announced.
The European single currency remains under pressure by a deepening recession and deteriorating fiscal position of some eurozone countries. The UK economy is not faring any better, as Britain slips into recession for the first time since 1992. But much of the negative outlook has already been factored into the pound, which lost about a quarter of its value against the dollar last year.
The pound reversed earlier gains against the dollar as some players took profits. It was down 0.3 percent at $1.4524. "There was one large sell-order, which spurred selling as some players took profits from sterling's rise during the day," said one London-based trader.
Sterling remains weighed down by ongoing UK banking sector woes and weak share prices. Sentiment was weak after worries that HSBC may have to raise more capital to shore up its balance sheet, and following Barclays' announcement of a further 2,100 job cuts on Wednesday.