Pound jumps to 5-month high vs dollar

By Jessica Mortimer

LONDON (Reuters) - Sterling jumped to a five-month high against the dollar on Wednesday, helped as ongoing optimism that the global economy is on the road to recovery weighed on the U.S. currency and stoked demand for riskier assets.

Gains in U.S. equities <.SPX><.DJI> and oil prices encouraged investors to take on more risk, while a move in sterling beyond its 200-day moving average against the dollar -- a key technical level -- helped it extend gains.

The UK currency has risen by nearly 6 percent against the dollar so far this month, leaving it on course for its biggest monthly gain since 1993.

Against a broadly firm euro, however, the pound dipped, with analysts citing a downbeat report on the UK economy from the International Monetary Fund.

The IMF said any recovery in the UK economy is likely to be subdued and warned that it is susceptible to potential shocks given high levels of borrowing and the fragility of the financial sector.

"Broad dollar weakness is contributing to the apparent strength in sterling against the dollar, but sterling strength against the euro is dissipating," CMC Markets chief strategist Ashraf Laidi said.

He added that although there has been some encouragement from firmer UK surveys and data recently, investors may still require more reassurance in the way of UK data.

In that light, investors will be looking closely at UK retail sales figures on Thursday, as well as the second estimate of UK first quarter gross domestic product on Friday for more evidence of a tentative economic recovery, he said.

At 3:46 p.m., sterling rose 1.1 percent against the dollar to $1.5638, having hit a five-month high of $1.5660.

An earlier breach of the 200-day moving average in sterling/dollar of around $1.5550/5 led to aggressive sterling buying.

Analysts said this leaves open a move towards its mid-December high of $1.5724.

The euro, however, rose 0.1 percent against sterling to 88.08 pence.


Earlier in the day, investors took heart from the fact that the minutes to this month's Bank of England's policy meeting contained no unpleasant surprises.

The Bank report revealed a unanimous vote to extend its quantitative easing programme by 50 billion pounds and a debate on whether to expand it by 75 billion. This caused a very brief dip in the pound which was rapidly reversed.

"Overall the minutes were broadly in line with the Bank of England's quarterly Inflation Report, so the reaction to the small talk of a greater amount of quantitative easing was very limited," Bank of Scotland Treasury currency strategist Naeem Wahid said.

"The key for sterling is that we have seen some signs of improvement in the UK banking sector and we are beginning to see signs of economic data improving," he added.

Meanwhile, a survey by the Confederation of British Industry on Wednesday showed manufacturing orders fell slightly more than expected but firms were more upbeat about the future than at any time since last September.

Later on Wednesday, investors will be looking to the minutes from the April policy-seeing meeting of the U.S. Federal Reserve for further direction.

(Editing by Stephen Nisbet)

Article Published: 20/05/2009