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Sterling hits five-month lows

Written By Trading Forex News on Monday, October 12, 2009 | 9:47 AM

By Michael Hunter

The outlook for global monetary policy shaped action on the foreign exchange markets on Monday, with sterling the main casualty.

A report from the Centre for Economics and Business Research predicted that UK interest rates would remain at their historic low of 0.5 per cent through 2010. The report also forecast they would stay below 2 per cent until 2014.

That would be likely to leave sterling the lowest-yielding major currency at a time when interest rates outside the UK look set to start rising.

The consultancy group even forecast that sterling could fall to as low as $1.40 against the dollar and slip below parity against the euro.

Traders continued to speculate that the Bank of England might increase the value of itsquantitative easing (QE) policy beyond the current £175bn, in stark contrast to the prospect of similar special stimulus measures being wound down in other economies.

“The divergence in what other central banks are saying and what the Bank says has continued,” said Divyang Shah at IFR Markets. “The market remains of the view that further QE could be announced in November.”

The pound hit a five-month low against a trade-weighted basket of leading currencies, losing 1.2 per cent to 77.1. It also hit a five-month low against the dollar of $1.5729, and a six-month trough versus the euro at £0.9383.

The single currency found support from a clearer outlook for monetary policy in the eurozone.

The dollar, meanwhile, spent much of the session trading above Y90 for the first time in a month. It later fell back to Y89.70, unchanged on the day, undermined by a return of risk appetite in equity and commodities markets.

Comments over the weekend from James Bullard, president of the St Louis Federal Reserve, that the US economy faced risks from rising inflation, further stoked speculation that US interest rates might rise sooner than had been expected.

Commodity currencies made progress in line with stronger prices for oil and metals. The Canadian dollar gained 1 per cent against its US counterpart to C$1.0329. while the Australian dollar rallied a further 0.4 per cent to $0.9077.

The Aussie leapt 4.7 per cent last week after the Reserve Bank of Australia became the first central bank to lift rates in the current cycle.

“The Aussie’s rally above here may be predicated on a pause in its recent advance, possibly caused by investors banking some gains. The catalyst for further gains once again could be built upon a ‘buy-the-dip’ mentality,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

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