Sterling inched up against the dollar on Wednesday on steady buying by sovereign investors, although speculation that the Bank of England will resort to more monetary easing is likely to cap gains.
Steady buying by Asian central banks saw the pound gain against the dollar to $1.5670, up 0.2 percent on the day, with option expiries at $1.5600 cited by traders. Near term resistance is seen at Tuesday's high of $1.5705 while support is seen around the session low of $1.5616.
"We remain bearish on cable and expect it to test $1.55 as speculation that the BOE could resort to quantitative easing next month gathers pace," said Richard Driver, currency analyst at Caxton FX.
"Also UK's proximity to the euro zone debt crisis and the fact that the U.S. dollar is the currency of choice for those seeking safety, we could see sterling under pressure against the dollar."
Expectations that the Bank of England will resort to more easing have picked up pace. BOE policymaker Ben Broadbent this week said the UK currency was likely to remain weak for some time and that a weak global economy would put downward pressure on inflation.
Other members of the committee have also turned dovish and as of last week economists polled by Reuters see a 75 percent chance that the BoE will opt for more quantitative easing in October or November.
The euro was a touch higher on the day at 87.05 pence, hovering within range of a six-month low of 85.31 pence hit earlier in the month. It faces resistance at 87.10 pence, its 200-day moving average.
"I remain short with stops above 87.40 pence for test of 85.80, as concerns about Greece and stocks should focus market on euro crosses," said a London based spot trader.
The euro got a brief lift in the European session in part due to comments from European Commission President Jose Barroso who said the euro zone could considering a wider guarantee mechanism to help Greek banks.
Nevertheless, the euro is likely to be undermined further by speculation that the European Central Bank will opt for a interest rate cut early next month. Also, traders are expecting some selling in the euro/sterling cross into the month-end related to EU payments to fund UK farm subsidies.
read more: Olympus Wealth Management
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