UK currency recovers vs. dollar but outlook fragile

Sterling recovered from early losses to rise against the dollar but it remained vulnerable after data kept alive the prospects of further monetary easing by the Bank of England. Retail sales for March fell broadly in line with expectations, keeping the jury out on whether poor domestic demand and consumer spending pushed the British economy into recession in the first quarter. Markets were forecasting a 0.8 percent fall in retail sales in March due to the unusually cold weather, so a 0.7 percent drop did little to support the currency, which fell to $ 1.5223, not far from the day’s low of $ 1.5218. The pound, however, saw some support against the dollar after poor US factory activity data added to worries the recovery of the world’s largest economy was faltering. Sterling was up 0.3 percent at $1.5281, after it broke through initial resistance of $ 1.5272, its 55-day moving average. There were reported offers to sell the pound above $ 1.5300, keeping any significant gains capped. “While we don’t expect the UK economy to be in recession, we do think it will have sluggish growth and the BoE will become more aggressive to support policy easing,” said Peter Frank, FX strategist at BBVA. “In the near term there is a big chance of a drop in sterling/dollar... we are looking at $1.44-$1.45 in the next two months.” Sterling has steadily retreated from a two-month high of $ 1.5412 hit last week. It struggled on Wednesday after data showed unemployment rising. “Most of the UK data has been disappointing. This along with expectations that a new leadership at the Bank of England could see more monetary easing will see sterling/dollar lose ground in the medium term,” said Alvin Tan, currency strategist at Societe Generale. While the minutes from the latest BoE monetary policy committee meeting showed policymakers remained split on whether to restart its asset purchase program, many analysts believe that more quantitative easing is likely once new Governor Mark Carney takes over on July 1. Quantitative easing involves pumping cash into the economy through bond-buying and tends to weigh on a currency by increasing its supply. Sterling was flat against the euro yesterday at 85.50 pence, off a one-month high for the single currency of 86.37 pence struck on Wednesday. The euro was hurt in the previous session by Bundesbank chief Jens Weidmann’s suggestion that the European Central Bank may adjust interest rates if new data warrants a cut and analysts expect its gains against the pound to run out of steam. Source: ArabNews