Sterling pared losses against the dollar and euro on Wednesday as some investors unwound bearish bets against the currency after a UK services sector survey surprised on the upside.
Those gains provided an opportunity to others to sell, however, as the survey did little to alter strong expectations that the Bank of England will ease monetary policy further in the near term, traders said.
Sterling was down 0.2 percent on the day at $1.5450 , having climbed to as high as $1.5474 from $1.5439 immediately after the survey of services sector purchasing managers (PMI) was released. Traders cited decent offers above $1.55, likely to prove a resistance level in the short term.
The currency came within striking distance of falling past last month's low of $1.5326 on Tuesday and a drop below that would take it to the lowest since early September 2010.
"Notwithstanding the services sector PMI, there are risks that the UK economy is headed towards a recession and sterling's performance reflects that," said Steve Barrow, currency analyst at Standard Bank.
"We are expecting the BOE to move this week with 50 billion pounds of stimulus and that could also weigh on the pound."
Sentiment towards sterling has soured markedly in recent weeks on expectations more quantitative easing may be needed to revive the flagging economy. Another round of the emergency monetary easing would expand the BOE's balance sheet and flood the market with the UK currency.
But while some investors speculate the bank could announce more easing as early as Thursday, November is still seen as a more likely date.
The PMI headline activity index rose to 52.9 in September from 51.1 in August, beating expectations of a 50.5 reading, but final GDP numbers released separately revised down already poor second quarter growth to just 0.1 percent.
ECB RATE DECISION
The BoE's policy committee starts its two-day meeting on Wednesday amid mounting turmoil in the euro zone, the UK's biggest export market, and growing worries that the sovereign debt crisis in the euro area will hurt banks across the region.
Morgan Stanley said in a note that while there has been some build up in market expectations for a return to QE as early as Thursday, it expects the November inflation report to provide a launch pad for the next round of easing.
"Hence, we would view any sterling/dollar rebound over the next couple of days as providing a renewed selling opportunity," it said.
The euro was flat against the pound at 86.10 pence , having fallen to a session low of 85.90 after the services sector survey was released. The shared currency bounced from a nine-month low against the dollar on Tuesday, but that rally seemed to be running out of steam.
Moody's downgraded Italy's bond rating by three notches to A2 which brought it in line with Standard and Poor's while investors remained sceptical about euro zone policymakers ability to act in a swift manner to prevent instability in the region's banking sector.
The ECB also decides on rates on Thursday and Barrow at Standard Bank said the euro is likely to volatile both against the dollar and sterling.
"If they go ahead and cut, the euro will fall. On the other hand, if they don't, it will leave investors who are looking for some kind of support from policymakers to the euro zone's problems disappointed," he said.
read more: Olympus Wealth Management
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