Sterling recovers as UK policy moves cheered
15/06/2012 at 12:54
* Sterling recovers from earlier falls
* Talk of SNB buying cable supports UK currency
* Traders looking ahead to Greek election on Sunday
By Tricia Wright
LONDON, June 15 Reuters - Sterling recovered on Friday as investors cut bearish bets ahead of a Greek election while some cheered UK policymakers' pre-emptive move to cushion the economy from the euro crisis even though expectations of more easing are likely to limit gains.
Traders said the British pound drew support from talk that the Swiss National Bank was recycling euros in its foreign exchange reserves into sterling. The SNB has stepped up its intervention by purchasing large amounts of euros to protect the cap on the Swiss franc, currently pegged at 1.20 francs.
Against the euro, sterling was slightly higher
"I think sterling will stick to its recent trading range. The BoE and Fed are both on the unrelenting path of money printing and when one seems to have calmed down, the other one starts again," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets.
The BoE's move to prevent the rapidly deteriorating euro zone crisis pushing the UK economy into an even deeper recession was expected to help sterling eke out gains against the euro in the next few weeks.
"We expect the impact of the new policies to be positive or at worst neutral in the longer run. Look to buy sterling on dips against dollar or the euro, depending on the Greek election outcome," Lloyds Bank said in a note.
The BoE's activation of an extended collateral term repo facility at a rate of 25 basis points above policy rates led to a sharp drop in sterling Libor rates, eating into the currency's interest rate advantage.
"I think policy activism is a positive, and want to use any sterling weakness as a chance to buy, but the rate-currency correlation argues for patience," said Kit Juckes, currency strategist at Societe Generale.
A bigger-than-expected British trade deficit for April had also earlier weighed on the pound, but the focus quickly shifted to the Greek election at the weekend. The election could determine whether the debt-laden country stays in the euro zone.
A win for pro-bailout parties such as the conservative New Democracy could trigger demand for perceived riskier assets, but any relief rally is expected to be temporary given the dire state of Greece's economy and concerns about Spanish banks.
"If we see a 'positive' outcome of the election on Sunday in Greece - i.e. win for New Democracy - the pound should rally, especially against the dollar, and against the yen," said Kathleen Brooks, research director at Forex.com.
Editing by Catherine Evans
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Keywords: MARKETS STERLING MIDSESSION