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Macroeconomic News


"Oversold" sterling recovers, helped by weaker euro

Wed, 13th Mar 2013 13:44


* Sterling recovers from 2-1/2 year low versus dollar

* Gains versus weaker euro on weak demand for Italy debt

* Pound looks oversold for now, but any gains seen limited

* Worries about prospect of UK recession, more QE remain

By Jessica Mortimer

LONDON, March 13 (Reuters) - Sterling recovered from a 2-1/2 year low against the dollar on Wednesday and gained against a weaker euro as some investors believed its recent steep falls may have gone too far for now.

A feeble UK economy was expected to leave it vulnerable to further falls, however.

The euro was down 0.7 percent at 86.85 pence, off a more than two-week high of 87.93 pence hit on Tuesday and pressured after an Italian sale of government debt drew weaker demand, causing Italian borrowing costs to rise.

Analysts said the pound's gains were also the result of investors who had sold it at higher levels seeing an opportunity to take profit, particularly given a lack of UK data for the rest of this week.

"When any currency falls too fast too quickly there is always going to be a correction. But fundamentals still point towards further sterling weakness," said Nawaz Ali, market analyst at Western Union Business Solutions.

The pound was up 0.3 percent against the dollar at $1.4955, off a low of $1.4832 hit on Tuesday after data showed UK manufacturing output contracted sharply in January. But its gains were tempered after better-than-expected U.S. retail sales data lifted the dollar.

Analysts said the pound could recover further in the coming days, with sterling/dollar's relative strength index, a chart indicator, suggesting the UK currency is oversold.

Sterling has been one of the worst performing currencies of 2013 and has lost more than 8 percent against the dollar and around 7 percent against the euro so far.

But any gains were expected to be limited. Tuesday's weak UK data raised the prospect of the economy slipping into another recession and increased the chances of the Bank of England extending bond purchases under its quantitative easing programme.

Central bank asset purchases increase the supply of a currency and drive down its value.

"There are signs of sterling looking a little oversold and this brings the potential for a recovery towards $1.50 or $1.51. But the bigger picture is for it to move lower," said Simon Smith, chief economist at FXPro.

He said any short-covering rally in the pound may be curtailed when UK finance minister George Osborne presents his budget on March 20.

Traders speculate that Osborne will announce a review of the BoE's remit and give it more leeway on inflation targeting, allowing scope for a further easing of monetary policy.

Analysts at Lloyds said in a note that the pound was "vulnerable to the downside on bad UK data/news". However, a lack of major UK data in the coming days should keep it above support at $1.4823 and 88 pence per euro for now.



(c) Copyright Thomson Reuters 2013. Click For Restrictions - http://about.reuters.com/fulllegal.asp




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