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Sterling firm near 2-week high

Wednesday, August 27 09:24:49

Sterling traded firm near two-week highs against a struggling euro on Wednesday, helped by widening interest rate differentials between the two-year British government bonds and their euro zone counterparts.

The gap between the two has moved in favour of sterling fixed income assets, rising to its highest since early July, amid expectations that the European Central Bank may resort to asset purchases, or quantitative easing, in coming months to ward off the growing threat of falling prices.

In contrast, investors are expecting the Bank of England to start tightening policy sometime in early 2015.

Euro zone inflation data is due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July, falling even further below the ECB's target of close-to-but-below 2 percent.

Last Friday, in stronger language than he has used in the past, ECB President Mario Draghi said the central bank was prepared to respond with "all the available instruments" should inflation drop further. That has seen euro zone bond yields drop to record lows and weighed on the euro.

The euro was down 0.1 percent at 79.565, having fallen to a two-week low of 79.49 earlier in the day. The euro has shed nearly 0.9 percent since Draghi's comments at Jackson Hole last Friday.

It bounced slightly against the dollar on Wednesday after German finance minister Wolfgang Schaeuble said Draghi's comments had been "overinterpreted", but traders said most investors were selling into the bounce.

"The UK data calendar is light into next week, thus the euro/sterling trend will largely be determined by the euro. Risks look skewed to 79.10/20 pence," said Chris Turner, head of currency strategy at ING.

Sterling was also higher against the dollar, gaining 0.15 percent to $1.6570 and staying well above the five-month low of $1.6501 struck on Monday after Scotland's pro-independence leader Alex Salmond won a final TV debate before a Sept. 18 referendum.

Opinion polls still suggest Scots will reject independence.

Apart from the uncertainty caused by the Scottish referendum which has in the margins pegged back the pound, sterling has also suffered as investors have unwound aggressive expectations of rate hikes later this year. (Reuters)

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