Sterling slides as BoE King hints at more QE

Sterling fell broadly on Tuesday, as Bank of England Governor Mervyn King said risks to the bank's central view of a gradual recovery remained to the downside and further quantitative easing may be needed.

King and other members of the MPC were speaking before the UK Treasury's Select Committee.

Their testimonies were based on the February inflation report, released after the BoE's Monetary Policy Committee (MPC) unanimously voted to pause a 200 billion pound programme of asset purchases aimed at easing the worst recession in decades.

At 1105 GMT, sterling had shed around 100 ticks to trade down roughly 0.3 percent versus the dollar GBP=D4 at $1.5425, off session lows of $1.5396 and reversing earlier gains which had come on the back of a broadly weaker greenback.

Against the euro EURGBP=D4, the pound moved above its 200-day moving average to trade up 0.5 percent at 88.30 pence. March UK gilt futures FLGH0 rallied to a session high of 114.48.

The BoE testimony has shown the decision not to expand quantitative easing was very finely balanced. It does look as though low rates are here to stay for the foreseeable future, said Rabobank currency strategist Jeremy Stretch.

MPC member David Miles had also talked about further QE purchases, saying the decision to pause was a pretty finely balanced decision. Miles added there could be a strong case for expanding QE further down the line.

The MPC had revised down its two-year inflation forecasts in the February inflation report, leading to some speculation that further asset purchases would be needed.

Sterling also fell to a fresh 25-year low versus the Australian dollar, as the diverging rate paths of the two economies continued to add downward pressure.

Reserve Bank of Australia Deputy Governor Ric Battellino said Tuesday the country was enjoying a mining boom that could last beyond 2020 and that policymakers would need to be disciplined to contain inflation it generates.

WEAK DATA

Sterling had hit a nine-month low of $1.5345 versus the U.S. dollar on Friday after a string of weak UK data continued with disappointing retail sales for January.

The bearish signs on the economy and a spiralling budget deficit had coincided with currency speculators boosting their short bets against sterling in the week ended Feb. 16, data on Friday showed.

Figures from the British Bankers Association on Tuesday added to the negative picture, showing the number of home purchases approved by British Banks in January fell sharply on the month.

Focus will now move towards the second estimate of UK gross domestic product due out on Friday, set to show only a small upward revision to 0.2 percent quarterly growth from a previous reading of 0.1 percent for the last three months of 2009.

Sentiment was also knocked after an opinion poll published on Sunday showed the opposition Conservative Party's lead over ruling Labour had shrunk, showing no one party would gain an overall majority after an election due by June. [ID:nUKPOLLS10]

Investors were worried a hung parliament would mean an incoming government would struggle to take the tough decisions necessary to bring down Britain's substantial budget deficit.

The UK public debt would become more of an issue were there to be a hung parliament and that would be a sterling negative. Also hung parliaments are less stable, adding to uncertainty, said Paul Robinson, sterling strategist at Barclays Capital.