Sterling hit a two-month high against the euro on Thursday as investors welcomed the Bank of England’s decision to cut UK interest rates to a record low.
The Bank, as expected by most forecasters, lowered UK interest rates by 50 basis points to 1 per cent after its policy meeting, warning that the global economy was in the throes of a severe and synchronised downturn.
But the pound advanced as the Bank also stated that the recent fiscal boost, the substantial fall in sterling and past falls in commodity prices would provide a considerable stimulus to activity as the year progressed.
Sterling also found support because investors had been expecting more details from the central bank about its possible adoption of alternative stimulus measures through its asset purchase facility.
David Powell of Bank of America said the implementation of a more aggressive quantitative easing policy would probably first require bringing UK interest rates to zero but the market was currently pricing in a trough in rates of just 0.75 per cent.
“The loss of yield support for sterling in the eventuality that this does become priced in – which we expect – would likely put the pound under further pressure,” he said.
But with no hint over the adoption of quantitative easing in the UK, the pound rose sharply, building on earlier gains after figures showed a surprise rise in UK house prices last month.
By midday in New York, the pound rose 1.1 per cent to $1.4632 against the dollar.
Sterling also climbed 2 per cent to Y132.09 against the yen and 1.2 per cent to an eight-week high of £0.8765 against the euro.
Meanwhile, the euro lost ground as the European Central Bank, as widely expected, kept interest rates on hold at 2 per cent after its policy meeting.
The single currency fell 0.2 per cent to $1.2828 against the dollar as Jean-Claude Trichet, ECB president, indicated that rates would be cut at the central bank’s March meeting and warned of a sharp slowdown in the eurozone.
The dollar was mixed, rising 0.9 per cent to Y90.30 against the yen and climbing 0.5 per cent to SFr1.1638 against the Swiss franc but losing ground against commodity-linked currencies as rising shipping costs hinted at a recovery in the raw materials trade.
The dollar fell 1.1 per cent to $0.6520 against the Australian dollar, lost 1.2 per cent to $0.5145 against the New Zealand dollar and eased 0.3 per cent to C$1.2288 against the Canadian dollar.
Elsewhere, the rouble traded down to 41 against its euro/dollar basket, hitting the lower limit of the Russian central bank’s new trading limit for the first time.
This sparked speculation that Russia would have to drain its foreign exchange reserves further to prop up the currency.
