The pound advanced on Tuesday as the weakening euro increased holdings of the former as safe-haven but the gains were capped on market talks of further QE.
Bank of England Governor Mervyn King did not rule out the possibility of an interest rate cut.
"I am particularly concerned because for two years now we have seen the situation in the euro area get worse, the problems have been pushed down the road," he told the Treasury Select Committee on Tuesday.
Prospects for further quantitative easing are highly likely as minutes from Bank of England's last policy meeting showed a narrow 5-4 split in favor of members voting to hold off on additional stimulus.
Policymaker David Miles said that quantitative easing will stimulate the economy more than a rate cut. There is a question mark over whether interest rate reduction would do any good, he said.
U.K. public sector net borrowing, excluding the temporary effects of financial interventions, increased to GBP 17.9 billion in May from GBP 15.2 billion a year ago, the Office for National Statistics said. Borrowing was higher than an expected GBP 14.8 billion.
At the same time, net debt at the end of May totaled GBP 1013.4 billion, equivalent to 65 percent of GDP. This compares with a level of 61.3 percent of public debt during the same period of last year.
The pound rose above the key 0.80 level against the euro for the first time in June, rising to nearly a 4-week high of 0.7987.
The euro was down as the market is looking for the 2-day EU summit in Brussels starting June 28.
The euro underperformed after Spain's borrowing costs continued to climb at an auction today, increasing concern about the prospects for the economy.
The common currency also came under pressure as Moody's Investors Service downgraded 28 Spanish banks yesterday, citing concern over the government's ability to repay debt and rising losses on real-estate loans.
A survey by market research group GfK showed that confidence among German consumers is likely to rise in July. The consumer confidence index for July rose to 5.8 from 5.7 in June. Economists expected the score to fall to 5.6 in July.
The sterling was also outperformed against its Swiss rival, approaching the 1.5050 resistance level for the first time since May 30.
Switzerland's consumption index dropped in May, reflecting a drop in business activity in the retail sector, data from UBS showed today.
The consumption indicator fell to 1.05 points in May from 1.37 in April. Nonetheless, UBS expects consumption to be the economy's most important support this year.
The strong franc, falling consumer prices and high immigration can lead to the consumption indicator underestimating actual consumption development, UBS said.
The pound that advanced to a 5-day high of 1.5653 against the dollar erased gains to reach as low as 1.5579 around 8:25 am ET.
Meanwhile the pound was the clear under-performer against the yen, falling nearly a weekly low of 123.57 around 8:25 am ET.
Looking ahead, the U.S. S&P/Case-Shiller home price index for April and the Conference Board's consumer confidence report for June are expected to influence the fx market in the New York session.
by RTT Staff Writer
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