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Sterling firm at seven-year high against weakening euro
[LONDON] Sterling held near a seven-year high against a weakened euro on Friday as expectations grew that the European Central Bank would resort to further monetary easing next week.
The euro was also nursing losses after the Swiss National Bank's surprising decision to scrap its three-year-old cap on the franc's value against the euro, which left currency investors reeling.
The SNB has been a major big buyer of euros and had stepped up its foreign exchange intervention in the past few weeks as it defended its 1.20-francs-per-euro cap, to prevent the Swiss currency from appreciating.
But with the cap abandoned, a big support for the euro - it has very few left - has gone.
As such, the euro hovered near a seven-year trough versus the pound at 76.28 pence struck on Thursday. It was last trading at 76.38 pence, down 0.3 per cent on the day. "We are seeing euro weakness across the board. The SNB decision comes ahead of key event risks in the euro zone-the ECB decision and the snap Greek elections," said Nawaz Ali, UK market analyst at Western Union. "We will see renewed volatility in currencies and euro/sterling is likely to weaken." Traders are speculating that the SNB knew that the European Central Bank was set to introduce a quantitative easing programme at its policy meeting next week, and that this prospect was acting as a drag on the euro.
Against the dollar, the pound was trading up 0.3 per cent at US$1.5230.
Some banks think the SNB's action improves the outlook for sterling, especially against the euro. They expect the pound to see safe-haven flows into the UK despite the political uncertainty of the coming months.
Traders said the pound was also still drawing support from expectations that the British economy would outperform its peers in the euro zone.
Traders will soon shift their focus to next week's UK labour data and minutes from the Bank of England's latest meeting. "While we expect these two to be marginal positives, a bounce in sterling more broadly has to wait for euro to bottom out," Citi said in a morning note.