Sterling Firmer, Brushes Aside Weak UK Borrowing Data

by
Reuters
Sterling rose against the euro and held near a two-month high against the dollar on Wednesday, shrugging off weak UK public sector borrowing data as investors stayed focused on when monetary policy will be tightened.
Euro Currency
 
* Currency market stays focused on broad upturn in UK economic outlook
 
* CBI industrial orders for August are next in focus
 
* Sterling/dollar holds near recent two-month highs
 
Sterling rose against the euro and held near a two-month high against the dollar on Wednesday, shrugging off weak UK public sector borrowing data as investors stayed focused on when monetary policy will be tightened.
 
Public borrowing showed a deficit of 62 million pounds last month, the first deficit for the month of July - which typically shows a surplus due to tax payments - since 2010 and much worse than a surplus of 2.45 billion forecast in a Reuters poll.
 
The data did little to take the steam out of rally that has seen sterling rise 3 percent against the dollar and 2.3 percent against the euro this month, driven by improving UK economic data that has suggested interest rates may rise sooner than the Bank of England has indicated.
 
"The borrowing data was not a great number, but in the bigger scheme of things not really terrible," said Craig Erlam, market analyst at Alpari. "Investors are more focused on the better growth numbers and the jobs outlook. So sterling has not shown much of a reaction to a small negative number."
 
The euro was down 0.2 percent against sterling at 85.45 , with support seen at its Aug. 15 low of 85.05. Sterling was flat against the dollar at $1.5672, not far from its two-month high of $1.5696, struck on Tuesday.
 
Traders said investors will be cautious about pushing sterling to those levels before the release of the minutes from the Federal Reserve's most recent policy meeting at 1800 GMT.
 
Confirmation that the Federal Open Market Committee is veering towards slowing its bond buying programme in September could see U.S. Treasury yields rise and help the dollar but a more cautious approach by the Fed could see the dollar weaken.
 
The gap between U.S. 10-year Treasury yields and British government bond yields has more than halved in recent weeks as investors priced in chances the UK central bank may have to tighten policy sooner than it has flagged.
 
Earlier this month, BoE governor Mark Carney pledged to keep interest rates low until unemployment falls to 7 percent, which the central bank sees as unlikely in the next three years. Improving economic conditions have cast doubt on this timetable.
 
Investors will next focus on industrial trends from the Confederation of British Industry, with forecasts for a pick-up in orders in August.
 
Adam Myers, European head of FX strategy at Credit Agricole, said a good number will support sterling.
 
"Contrasted against a still-cautious Fed and ECB with little policy room to manoeuvre, this should maintain a bid for sterling versus both dollar and euro through Friday. As such we recommend investors stay with sterling/dollar longs while selling into yesterday's euro/sterling squeeze."