Sterling rebounds versus soft dollar but still fragile - Reuters UK

Fri Oct 7, 2011 3:59pm BST

(Adds details, updates prices)

* Sterling climbs as investors take profit post-BoE

* Better U.S. jobs data pushes the pound above $1.5600

* Medium-term picture still clouded by econ concerns

By Neal Armstrong

LONDON, Oct 7 (Reuters) - Sterling rose against the dollar on Friday as traders who had sold after the Bank of England announced another round of quantitative easing on Thursday booked profits, while better-than-expected U.S. jobs data also gave the pound a boost.

Market players said an excessive build-up of short positions in the wake of the QE announcement had contributed to sterling's bounce, but medium-term worries over the state of the economy kept investors wary of actively buying the currency.

Sterling was up over one percent on the day at $1.5640 , well above Thursday's 14-month low of $1.5270. It rose above $1.5600 as the dollar came under broad selling pressure in the wake of U.S. non-farm payrolls for September coming in stronger than expected.

A European investment bank and a UK clearer were cited as the main buyers on the day, with strong selling interest above $1.5600 being steadily eroded. Key resistance was highlighted at the late September high of $1.5716, a break above which would be needed to confirm a technical double-bottom pattern.

The UK currency shrugged off a Moody's rating downgrade of 12 UK financial institutions. Traders said the reaction in sterling was limited because the downgrades had not been as severe as some market players expected.

"Cable is actually pretty well supported in the near term. The market had become a little bit over-extended and we are seeing a correction taking place," said Ian Stannard, head of European FX strategy at Morgan Stanley.

"But the announcement from the BoE is obviously going to be an outright negative. The QE move once it starts will put sterling under some pressure. We are bearish in the medium term and looking for sterling to decline into $1.51."

The BoE's addition of 75 billion pounds to its 200 billion asset purchase programme highlights the precarious state of Britain's economy as global growth slows, government spending cuts and tax hikes bite and consumers face high inflation and slow wage rises.

Asset purchasing is seen as negative for the pound because the market is flooded with the currency, stifling demand.

BOE AHEAD OF THE CURVE?

The euro fell 0.6 percent to 86.43 pence , after jumping to a high of 87.35 pence following the QE announcement on Thursday.

With the European Central Bank keeping rates on hold on Thursday, the UK leads other developed countries in the latest round of injecting funds into the market while keeping rates historically low.

Some analysts said by introducing QE in October rather than November, as many in the market had anticipated, the BoE could be seen as taking more decisive steps to tackle slowing growth.

"In this climate there is scope for sterling to outperform the euro. The BoE has acted sooner than the market was expecting while the ECB only did what was required of them. The BoE has perhaps got ahead of the curve," said Jane Foley, currency strategist at Rabobank.

The single currency remains at risk from market perception that policymakers are not taking appropriate steps to prevent contagion from the Greek debt crisis spreading to the euro zone banking system.

Technical analysts said the outlook for the euro would remain bearish while it held below 200-day moving average resistance at 87.14. (Additional reporting by Nia Williams; Editing by Stephen Nisbet)