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Euro falls to 3-month Sterling low

Friday, May 09 10:34:01

The euro fell to an almost three-month low against Sterling today with the pound supported by a widening yield advantage as investors bet the ECB will soon cut interest rates while the Bank of England prepares the ground to raise them.

The difference between two-year UK and euro zone bond yields widened to 64 basis points, the biggest gap in favour of sterling since the fall of 2008.

This helped ensure the value of sterling on a trade-weighted basis remained near a five-year peak and on track for its fourth weekly increase in a row - its best run this year - even as the UK currency slipped further back from this week's high just shy of $1.70 against the dollar.

British manufacturing, industrial production and trade data for March released on Friday had little impact on the pound, leaving investors to trim positions and look ahead to next week's quarterly Inflation Report from the Bank of England.

"We remain constructive on sterling and continue to favour adding on dips," said Josh O'Byrne, currency strategist at Citi in London.

At 0850 GMT the euro was flat on the day At 81.70 pence , having earlier in the day hit a near three-month low of 81.56 pence.

The pound slipped 0.1 percent against the dollar to trade at $1.6910. Earlier this week it traded as high as $1.6996, a level not seen since August 2009.

Trade-weighted sterling was held up at this week's high of 89.60.

Money market traders expect the BoE to start raising interest rates in the first quarter of next year. Citi economists reckon the first move will come in November this year.

Either way, the BoE's stance contrasts sharply with the ECB. ECB president Mario Draghi said on Thursday the central bank would be "comfortable" easing policy next month to combat the threat of deflation and effects of a strong currency.

As expected, the Bank of England took no action and issued no statement on policy after its May meeting on Thursday. All eyes are now on what clues the Bank gives on the rate outlook in Wednesday's Inflation Report.

The latest UK economic figures on Friday showed factory output grew at its fastest pace for a calendar quarter in nearly 15 years during the first three months of 2014, while the trade deficit narrowed slightly in March. (Reuters)