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Sterling tops one-year high on euro

Thursday, January 09 15:24:39

Sterling reached a one-year high against the euro today as investors bet the Bank of England and European Central Bank would pursue diverging monetary policies.

The BoE kept interest rates at a record low of 0.5 percent and its bond-buying program unchanged at 375 billion pounds, as expected. The European Central Bank left rates unchanged as well, which was also expected.

The euro slid as low as 82.26 pence against sterling , its lowest since January last year. By 1330 GMT, it had recovered some ground to trade at 82.45 pence.

The BoE gave no statement after its decision, which is customary when policy does not change. But traders said the lack of any comment suggests the central bank is not about to lower its threshold for raising interest rates, an unemployment rate of 7 percent.

When Governor Mark Carney announced his "forward guidance" last August, the BoE expected the jobless rate to remain at least at 7 percent until after the middle of 2016. Now it appears that threshold may be crossed this year. That might force Carney to lower the threshold or else to raise rates sooner than he had forecast only a few months ago.

Neil Jones, head of hedge fund FX sales at Mizuho in London, said that while the Bank may still lower the threshold to 6.75 or 6.5 percent in the coming months, it missed an opportunity to do so today.

"The UK will be the first to raise rates out of the major economies," Jones said. "That was reinforced today - the statement was conspicuous by its absence."

The ECB held fire, too, but in his post-meeting press conference, the bank's president, Mario Draghi, said the ECB is ready to act to counter tightening money market conditions and low inflation. That weighed on the euro across the board, pushing it to a fresh one-year low against sterling.

By contrast, sterling gained broadly. At 1330 GMT, the pound was up 0.1 percent on the day against the dollar at $1.6465 . Shortly after the BoE's decision, it rose as high as $1.6495, a one-week peak.

Investors marginally pared back bets for a UK rate rise in early 2015 after the BoE decision, with the March 2015 short sterling rate future rising by 2 ticks in the 15 minutes after the decision.

By 1325 GMT, however, the contract was back at its pre-decision level of 98.94, barely changed from Wednesday's settlement price.

The UK unemployment rate is crucial to the timing of any move on interest rates and therefore sterling's direction. But that outlook is being muddied by inflation at a four-year low of 2.1 percent, something the BoE will have to grapple with too.

Analysts at Barclays reckon the faster fall in unemployment suggests there is less spare capacity in the economy than thought, making it harder for the Bank to keep rates at their current record low.