Euro steadies after selloff, sterling drops after BoE report

[May 14, 2014]  By Anirban Nag

LONDON (Reuters) — The euro steadied against the dollar on Wednesday and rebounded from a 16-month trough against the British pound after the Bank of England doused expectations of monetary tightening in the near term.

The euro was also being helped by steady purchases by Asian central banks, which have been actively intervening to curtail the strength of their currencies. Such recycling of foreign exchange reserves by the South Korean and Chinese central banks has underpinned the euro despite growing rate cut expectations.

On Tuesday, the euro was hurt by a media report that the Bundesbank was ready to back a raft of stimulus measures for the euro zone economy if the European Central Bank cuts its own inflation forecasts next week.

That bolstered expectations of policy easing by the ECB next month and saw the euro drop to a two-month low against the yen and hit a 16-month trough against the pound earlier in the European session.

Reuters on Wednesday quoted sources as saying the ECB was preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
 

The euro was steady against the dollar at $1.3710, having hit a low of $1.36885 on Tuesday. It was up 0.3 percent against sterling at 81.75 pence, rebounding from a low of 81.26 pence.

"The market is generally 'long euro', and so should find it easy to sell - except people have been burned so many times by thinking the euro was headed lower only to find it bouncing back," said Marshall Gittler, head of global FX strategy at IronFX.

"On the other hand, few people are willing to pick a bottom when it looks as if this may be the real thing with regards to a change in sentiment at the ECB."

BOE DOUSES HIKE EXPECTATIONS

Sterling fell to a one-month low against the dollar after the Bank of England doused expectations of near-term monetary tightening in its quarterly inflation report. <GBP/>

Some in the market had positioned themselves for a hawkish message from the Bank, which would have added to expectations that the bank could begin raising interest rates as early as later this year.

Sterling fell to a one-month low of $1.6759 after the report was released from around $1.6820 beforehand. It was last trading at $1.6770, down 0.3 percent on the day.

In the report, the Bank said it remained in no rush to raise its benchmark interest rate from a record low 0.5 percent, and that it still saw borrowing costs rising in about a year's time. It also noted that sterling appreciation was putting downward pressure on inflation.

"Though (BoE chief) Mark Carney indicated 'one-off' changes would have likely just transitory effects, he indicated that persistent strength ... could slow the eventual tightening cycle," said Josh O'Byrne, currency strategist at Citi.

(Editing by Kevin Liffey)

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