Sterling inched up from a 2-1/2 year low against the dollar on Monday as some investors cut earlier bets against it and booked profits, though gains were likely to be capped by concerns about the British economy. With the country on the edge of its third recession on four years, speculation has grown that the Bank of England may resort to more monetary easing as early as Thursday to stimulate growth.
The pound was up 0.2 percent on the day to $1.5067 on short-covering. It recovered from an earlier fall to $1.50 after a Purchasing Managers' Index showed British construction output last month fell at its fastest pace since October 2009. The currency held within sight of Friday's trough of $1.4985, which was hit after PMI data showed a shock contraction in Britain's manufacturing sector last month.
It was the first time sterling had fallen below $1.50 since July 2010. The pound has been one of the worst performing major currencies of 2013, dropping more than 7 percent against the dollar. The euro gave up brief gains made after the British construction PMI data and dipped 0.3 percent on the day to 86.30 pence, retreating from last week's 16-month peak of 88.15 pence.
Some strategists said there was scope for a bounce given the extent of sterling's recent sharp slide, but any reprieve was likely to be temporary given the risk of policymakers opting for more quantitative easing to stimulate growth. "The more influential members of the Bank of England are pushing for more QE and at the same time you have a stronger dollar undercurrent coming through on US data so if we do get a correction higher it will be relatively shallow," said Chris Turner, head of FX strategy at ING.
"I think the clearest trade out there is to be short sterling/dollar," he said, adding the pair would target $1.48. Many investors are speculating policymakers will opt to extend their 375 billion pound quantitative easing programme by 25 billion. QE, which involves pumping money into the economy through bond purchases, tends to weigh on a currency by increasing its supply.