Sterling dips on euro bounce, focus on Draghi hearing

A bank employee counts pound notes at Kasikornbank in Bangkok

By Patrick Graham

LONDON (Reuters) – Sterling touched a two-week high against the dollar but slid back against the euro on Monday, with the day’s main focus likely to be European Central Bank chief Mario Draghi’s testimony in the European Parliament.

With 10 days until a policy meeting long expected to signal the pace of quantitative easing next year, Draghi’s comments have the potential to shift the euro higher after two better days driven in part by suggestions the bank could hold off on any signal of easier policy.

The single currency, also helped by Sunday’s victory for Francois Fillon in the French right’s presidential primary, was 0.2 percent higher against sterling on Monday after racking up its worst run of weekly losses against the pound since early 2015 last week.

Against the dollar, sterling was just 0.1 percent higher at $1.2488, having touched $1.2532 in Asian trading.

“While the Cable (dollar) rate may not be directly impacted, Draghi’s comments are sure to influence the EURGBP rate,” London currencies exchange LMAX said in a morning note.

The pound’s long-term correlation with the dollar has kicked back in as the U.S. currency rallied in the past month and some major investors began to argue the market had come far enough to account for the initial risks related to Britain’s planned departure from the European Union.

That has made sterling among the best performing major currencies and given food to thought to the bears calling for a fall to $1.15 or lower in the first half of next year.

Lee Hardman, a currency analyst with Japan’s MUFG in London, argued that the breakdown of third-quarter gross domestic product numbers also offered more hope. Business investment again topped expectations to grow by 0.9 percent on the quarter, although it was still down 1.6 percent year on year.

“The BoE has been warning that business investment would be the most vulnerable to heightened uncertainty related to the Brexit vote, but so far the negative impact is not yet evident,” Hardman said.

“If the UK economy continues to defy expectations for a material slowdown in growth in the year ahead, it will create scope for pound weakness to reverse further.”

(Editing by Mark Trevelyan)