Sterling fell against the dollar on Monday as concerns about Greece and Spain crimped demand for perceived riskier currencies and outweighed better-than-expected UK lending data. The pound tracked a drop in the euro against the dollar, with the single currency pressured by uncertainty over whether Greece can agree to a deal on austerity, while Spain continued to hold out on requesting a bailout.
Worries about the impact of Hurricane Sandy on the east coast of the United States added to broader demand for the safe-haven dollar. Sterling fell 0.5 percent to $1.6025, retreating from last week's high of $1.6144. Technical charts showed support around the 55-day moving average at $1.6012, while a break below that level could lead to a test of the 200-day moving average around $1.5837.
Lending to Britain's consumers rose at the fastest pace in more than 4-1/2 years in September and mortgage approvals for house purchases also beat forecasts, although the figures were unable to boost the pound. "At the margin the data plays slightly positive for sterling given the Bank of England has put so much emphasis on the FLS (Funding for Lending Scheme) and appears to be backing away from additional quantitative easing in the November meeting," said Paul Robson, currency strategist at RBS.
The BoE's "Funding for Lending" programme, which offers banks cheap funding if they maintain or increase lending, was introduced earlier this year to help boost UK economic growth. While the better lending data added to signs of recovering economic activity, some strategists said sterling was still vulnerable to developments in the indebted euro zone, the UK's largest trading partner.
The euro rose 0.2 percent against the pound to 80.46 pence, edging away from Friday's low of 80.02 pence, its weakest level since early October. The pound outperformed other currencies last week after stronger-than-expected Q3 growth figures showed the UK had climbed out of recession and reduced bets on the BoE opting for further asset-buying quantitative easing in November. Recent comments by BoE policymakers indicated that the UK economy was still weak however, and there was still a possibility of further asset purchases to help stimulate growth.
Chief economist Spencer Dale said economic growth in Britain would be "materially" lower in the fourth quarter, while deputy governor Charlie Bean warned against getting overexcited about the latest GDP figures. The next focus for investors is Purchasing Managers' Index (PMI) data on manufacturing and construction activity, due later this week, which should indicate whether the strong momentum from the third quarter continued into the fourth. "There's a sense we are waiting for PMI data later in the week to decide where we are going with the BoE debate the following week," said Daragh Maher, currency strategist at HSBC.
The pound could suffer if a weaker growth outlook leads of speculation that the UK government may abandon tough austerity measures aimed at cutting the budget deficit, he added. "Markets have built in a lot of goodwill towards sterling on the basis the UK is committed to austerity. If they retreated on that sterling would be vulnerable to weakness, especially versus the euro," Maher said.