Sterling stuck near lows

Reuters.

A woman passes by an outdoor advert with an image of the British pound bank note.

London - Sterling was stuck near a 2-1/2-year low against the dollar on Monday and is likely to drift lower, hurt by the contrasting fortunes of the British and US economies.

While strong US jobs numbers late last week bolstered speculation that the Federal Reserve may curtail its asset purchase programme later this year, Britain may be set to enter its third recession in four years.

That is likely to drive the Bank of England to print more money to support the economy.

Central bank asset purchases, or quantitative easing, increase the supply of a currency and drive down its value.

As a result, investors are likely to sell sterling on upticks and the pound is likely to suffer in coming days, traders said.

The pound has been one of the worst performing major currencies in 2013, falling 8.2 percent against the dollar and 6.8 percent against the euro.

Sterling was at $1.4927, not far from a trough of $1.4886 hit on Friday - its lowest since mid-2010 - after the US data was released. US non-farm payrolls surged by 236,000 last month, beating forecasts and pushing the jobless rate down to 7.7 percent - the lowest since December 2008.

The spreads between two-year US government bonds yields and their British counterparts are also moving in favour of US debt, underpinning dollar demand.

The euro was also steady against sterling at 87.05 pence, but the euro's gains are likely to be curtailed by lingering concerns about Italy.

Fitch lowered Italy's sovereign rating by one notch to BBB-plus, with a negative outlook, due to political uncertainty after inconclusive elections.

Analysts said investors will be more comfortable in expressing a bearish view on the British economy by selling the pound against the dollar rather than the euro.

“Investors should stay short cable (sterling/dollar). We anticipate the exchange rate will fall to $1.41 as the market expects a shift in the Bank of England's policy framework,” said Mansoor Mohiuddin, chief currency strategist at UBS.

Speculation is mounting that Chancellor George Osborne may announce a review of the BoE's remit when he presents his budget on March 20 and give it more leeway on inflation targeting.

The Chancellor could also consider adding targeting employment to the BoE's objectives as the government tries to put in place aggressive measures to kickstart the economy.

“If Osborne announces such a review in his annual Budget speech, sterling will stay under pressure as investors will anticipate further easing in future,” Mohiuddin added.

The loss of Britain's prized triple-A credit ratings after a Moody's downgrade has also unnerved investors and called into question the government's strict austerity measures which some say have hurt growth.

Speculators increased their bets against the pound, with net short positions rising in the latest week to March 5, data from the Commodity Futures Trading Commission showed on Friday.

“As growth expectations are likely to weaken further there is no scope for any sustainable upside to rate expectations. In addition, the risk of additional easing remains intact,” Credit Agricole said in note. “Sterling will remain under pressure in the coming few weeks.” - Reuters