Pound on solid ground

The safe-haven status of sterling is expected to outweigh concerns that such loose monetary policy weakens a currency. Worries about the euro zone will see to that reports UK Reuters.

High borrowing costs in Italy and Spain and continued concerns about the viability of Greece remaining in the euro zone mean investors may be willing to ignore the perceived wisdom that central bank asset-buying, or quantitative easing, knocks a currency down by increasing supply in the system.

In fact, with any renewed bond-buying programme supporting UK bond prices — increasing their allure as an alternative to euro zone sovereign debt — the pound could rise to highs against the euro last seen before Lehman Brothers collapsed in 2008.

“Because the BoE is buying gilts and there are a lot of problems in the euro area the UK is being seen as a safe haven for the bond market,” said Sara Yates, FX strategist at Barclays, who forecast the euro to hit 75 pence in 12 months.

It was trading around 80 pence on Tuesday.

“QE has two faces. It is negative for sterling on interest rate differentials, but also has a positive feed into sterling from the bond market,” Yates said.

Ten-year bond, or gilt, yields reached record lows in early June as investors seeking relative safety switched out of troubled peripheral sovereigns into UK government bonds – and bought sterling against the euro to fund the move.

Normally these low yields would erode demand for sterling-based assets, but many strategists say that as the impact of rate differentials on sterling have been waning since 2008, more QE would be unlikely to weigh significantly on the currency.

Indeed, QE could be seen as a substitute rather than a complement to a further cut in UK rates, already at a record low of 0.5 percent.

Investors could have even more reasons to buy sterling if the European Central Bank cuts rates on Thursday as expected.