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Sterling weak on prospects of more Bank of England easing

Sterling weak on prospects of more Bank of England easing

Sterling was boosted on Tuesday after Britain’s retail and services sector grew more than expected in February, hoping that the economy may avoid a triple-dip recession. This prompted some in the market to believe the Monetary Policy Committee would decide not to restart its asset purchase programme. Comments by BoE policymakers signalled the bank was ready to take steps to stimulate the economy. While prospects of the BoE extending its £375 billion quantitative easing programme by £25 billion has weighed on sterling, talk of a weaker pound being needed to rebalance Britain’s economy has also hurt it. Recent comments by BoE policymakers on the need for more stimulus, negative interest rates and a perceived greater tolerance of above-target inflation also kept the British currency’s outlook bleak.

Meanwhile, the Euro lagged gains in growth-linked currencies on Wednesday, held back by concern that the European Central Bank could flag future interest rate cuts after its monthly policy-setting meeting on Thursday. The key to the shared currency’s near-term outlook is seen as ECB President Mario Draghi’s stance on interest rates. The ECB will announce its rate decision on Thursday and while it is widely expected to keep policy unchanged, staff projections for both growth and inflation are likely to be on the lower side, giving the central bank ample room to lower rates in coming months. The political stalemate in Italy following inconclusive elections is also likely to keep the euro subdued.

On the FX markets, GBP/USD squeezed higher on Tuesday following the release of better than expected UK Services PMI report (highest since September). However the underlying trend remains bearish and near-term support levels are seen at 1.4949 which is the July 2010 low and then at 1.4687 which is the June 2010 low. Even though the latest Services PMI data surprised to the upside, many other macroeconomic data points underline the need for further policy easing and there is growing speculation that the BoE may boost the Asset Purchase Facility (APF) when the MPC meet later on this week.

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