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Euro makes headway against Sterling

Wednesday, August 27 16:52:52

Sterling pared gains against the euro today after European Central Bank sources told Reuters the bank was unlikely to loosen policy next week unless inflation drops sharply.

Traders said the comments made monetary easing look less likely for now, providing some relief for the struggling euro. The currency had reached a two-week low against the pound and a one-year trough against the dollar earlier in the day.

Earlier, German bond yields had fallen to record lows on speculation the ECB would resort to asset purchases, or quantitative easing, to revive the euro zone's economy. That had helped widen interest rate differentials in favour of sterling fixed-income assets, which in turn pushed up the pound.

In contrast to expectations of ECB easing, investors are factoring in the likelihood the Bank of England will tighten policy sometime in early 2015.

The euro recovered to 79.615 in afternoon trade, after dropping to a two-week low of 79.385 earlier in the day. The euro has shed 0.9 percent since ECB chief Mario Draghi flagged the possibility of more monetary stimulus at Jackson Hole last Friday.

Euro zone inflation data will be released 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.

Risks of a soft inflation reading are likely to make it tough for the euro to gain much ground.

"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 held its gains against the dollar, strengthening by 0.25 percent to $1.6580. That was 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 over the Scottish referendum, which has the pound back to some extent, sterling has also suffered as investors have unwound aggressive expectations of rate hikes later this year.

Last week, minutes from the BoE's latest policy committee meeting showing two of the nine members voted for an immediate rate increase. But falling wages and slowing inflation, as well as dovish signals from the central bank, have led many to push back rate-rise expectations well into 2015. For more visit: www.businessworld.ie