Sterling weakens as investors fret over Carney's message, yen firm

[June 25, 2014] By Anirban Nag

LONDON (Reuters) - Sterling stayed under pressure for a second day on Wednesday, as investors cut favorable bets on the currency after Bank of England governor cooled expectations of an interest rate hike later this year.

The euro was the main beneficiary of the pound's losses. The single currency also made gains against growth-linked and less-liquid currencies like the Australian dollar amid geopolitical concerns in the Middle East, which have knocked down shares. The situation in Iraq was also supporting the safe-haven yen, traders said.

Most of the attention, though, was on the pound after surprisingly less hawkish comments from BoE Governor Mark Carney on Tuesday. The pound fell to a one-week low of $1.6952 <GBP=D4> and pulled further away from a 5-1/2 year peak of $1.7064 hit last Wednesday. The euro rose to a near two-week high of 80.315 pence, before easing back a bit to trade at 80.15.

Carney said Britain's economy still has plenty of slack to work through and that financial markets underestimated how much uncertainty there was in the economy.

Analysts said his comments contrasted with a speech he made earlier this month and dented expectations for a rate rise before the end of this year.
 

The resulting uncertainty about the bank's stance was driving speculators to trim huge bets placed in sterling's favor.

"The net result in the very near term may be that from a very overbought position technically, the pound will see a correction, toward $1.6920 against the dollar and 81.10 for euro/sterling," said Kit Juckes, currency analyst at Societe Generale.

DOLLAR AWAITS GDP REVISION

The dollar drifted lower against the yen with some investors cautious ahead of the final reading of first-quarter U.S. GDP and durable goods numbers for May. <ECONUS> The GDP data is forecast to be revised down and could boost expectations that the Federal Reserve is in no hurry to tighten policy.

Influential Federal Reserve policymaker, William Dudley, said on Tuesday the U.S. central bank could reasonably wait until mid-2015 to raise interest rates without risking an undesirable rise in inflation.

"The continued wave of dovish sentiments that are flowing from the Fed are ensuring that the dollar retains a weakened position," said Jane Foley, senior currency strategist at Rabobank.

"In this environment it will remain difficult for dollar/yen to make upside progress almost irrespective of policy actions taken in Japan. Another factor that is inhibiting the yen from softening is the current wave of geopolitical tension."

The dollar was down 0.1 percent versus the yen at 101.90 while the euro was flat at $1.3605. The euro was slightly lower against the yen at 138.65 yen.

Japanese CPI will be released on Friday and any fresh signs of the country escaping deflation are likely to further curb prospects for additional BOJ easing.

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Andrew Heavens and Susan Fenton)

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