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Sterling falls to 1-wk low vs euro as ECB lifts growth f'cast

Thursday, 5 Dec 2013 | 10:46 AM ET

LONDON, Dec 5 (Reuters) - Sterling fell to its lowest against the euro in more than a week on Thursday as the European Central Bank upgraded its growth forecasts and the head of the ECB appeared to be cautious about more easing.

Traders said the euro got a boost when the ECB staff forecast growth at 1.1 percent next year, slightly higher than the 1.0 percent estimated in September. Earlier on Thursday, the ECB kept rates unchanged at record lows, as expected.

The staff also predicted inflation would average just 1.1 percent next year and 1.3 percent in 2015 - well below the target of just under 2 percent. But ECB chief Mario Draghi laid out no new measures to tackle disinflation.

"The ECB signalled no imminent need for further easing from here," said Valentin Marinov, a currency strategist at Citi. "President Draghi surprised again, this time by sounding less dovish than the market was expecting going into the meeting."

The euro was up 0.7 percent against the pound at 83.565 pence, triggering stop-loss buy orders on its break above 83.30 pence and moving further away from a 11-month low of 82.53 pence struck on Monday.

Traders said the euro's moves higher may be shortlived, especially against the pound, since investors are pricing in rate increase by the Bank of England while the ECB is expected to ease policy in coming months.

"We continue to like short euro/sterling positions over longer term," Citi's Marinov said.

The pound showed little reaction to the BoE decision to keep interest rates unchanged. But surveys of services, construction and manufacturing this week showed the British economy is getting stronger, leading investors to price in an early tightening, supporting the pound.

Overnight sterling interbank average rates - the very short-term interest rates that form the basis of lending costs in the wider economy - were pricing in a slight chance of a move in 18 months' time and a greater risk of tightening in two years' time.

Sterling fell 0.4 percent against the dollar to $1.6320 , after U.S. third-quarter growth data was revised upwards. The pound was also hurt after the UK debt management office announced a smaller-than-expected downward revision to government bond issuances.

Despite the drop, investors remained bullish on the pound.

"Sterling is a buy on dips. We should see it rise towards $1.64 and perhaps even $1.65," said Alex Edwards, head of corporate sales at UKForex.

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