CURRENCIES: Sterling Mixed Ahead Of Bank Of England Rate Decision

By William L. Watts

The British pound was mixed against major currencies as traders awaited an interest-rate decision by the Bank of England's rate-setting Monetary Policy Committee at noon local time, or 7 a.m. Eastern.

The MPC last month slashed the key rate a full percentage point to 2%, matching the all-time low for the benchmark since the BOE's founding in 1694. Economists widely expect a further half-point cut to 1.5%, and many see scope for a bigger move.

But some strategists said the pound's sharp plunge at the end of last year, which temporarily drove sterling to the verge of parity with the euro, will likely restrain policy makers somewhat.

"The exchange rate might even get a mention in the interest-rate statement as the BOE will like to avoid a 'sell Britain' [reaction] as rates fall towards historic lows," wrote strategists at BNP Paribas.

Against the dollar, the British pound slipped to $1.5034 from $1.5097 in North American trade late Wednesday. The euro was down slightly against the pound at 90.21 pence.

The euro retreated to $1.3585 against the dollar, down from $1.3606.

The dollar index (DXY), a measure of the greenback against a trade-weighted index of six major currencies, rose slightly to 82.490 from 82.332.

The dollar fell versus the Japanese currency, dipping to 91.62 yen from 92.66 yen Wednesday.

The European single currency nudged back toward the day's lows after data showed a sharper-than-expected drop in economic sentiment across the region last month.

The European Commission on Thursday said its economic sentiment indicator for the euro zone fell 7.8 points to 67.1 in December, the lowest reading since the index was launched in 1985.

Consensus expectations were for a decline to 71.3 from 74.9 in November. The commission's industrial and consumer confidence indicators also fell to their lowest levels since 1985, while the services confidence indicator tumbled to its lowest level since the survey was introduced 12 years ago, the commission said.

A stream of deteriorating economic data and falling inflation indicators will increase pressure on the European Central Bank to cut rates when it meets next Thursday, economists said.

That's despite remarks by ECB President Jean-Claude Trichet and other officials that have indicated the central bank would prefer to pause after cuttings its key lending rate by 175 basis points, or 1.75 percentage points, to 2.5% since October.

"Clearly, after today's figures, chances for a 50 basis point move are rising," said Aurelio Maccario, chief euro zone economist at UniCredit MIB in Milan.

"Considering that Trichet himself has been claiming that a pause would have been wise in order to see how recent cuts feed through the real economy, we remain inclined to think that the consensus within the council will coagulate on a 25 basis point move," Maccario said.

The dollar fell Wednesday after the ADP Employment Services report said private companies cut 693,000 jobs in December, almost 50% more than some economists had predicted.

The report came two days before the Labor Department's nonfarm payrolls report for December, which some analysts expect to show an increase in unemployment to 7.1% from 6.7% in November.

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(END) Dow Jones Newswires

January 08, 2009 05:59 ET (10:59 GMT)


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