Sterling firm vs euro as ECB and BoE policy paths may diverge

By Anirban Nag

LONDON, March 6 (Reuters) - Sterling rose for a second day against the euro on Thursday, buoyed by upbeat British data and expectations that the path of British interest rates will diverge from that in the euro zone.

While the Bank of England is widely expected to hold rates and keep its asset purchase programme unchanged on Thursday, markets are pricing in the chance of a first rate hike in the spring of 2015.

In contrast, investors are preparing for a possible policy easing by the European Central Bank after its monthly meeting.

Data from mortgage lender Halifax on Thursday showed British house prices soared in February at the fastest monthly pace since May 2009.

That came a day after a buoyant survey of the services sector kept expectations alive that the British economy is on a robust recovery path while the euro zone economy is witnessing sluggish growth and disinflation.

The euro was down slightly on the day at 82.11 pence . In the options market, short term risk reversals - a gauge of demand for options betting on a currency rising or falling show - that a growing bias for sterling strength against the euro.

Against the dollar, sterling was slightly higher at $1.6717, not far from a four-year high of $1.6823 struck in the middle of February.

"The pound is expected to continue to strengthen following the stronger-than-expected UK services PMI survey which remained consistent with robust growth in Q1," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.

According to the bank's valuation model, the euro was looking expensive in the near-term, he added. That could leave it sensitive to a dovish ECB surprise on Thursday.

An ECB source told Reuters at the start of this week that there would be unanimous agreement to end so-called sterilisation of the bond purchases the bank has made as part of efforts to ease the euro zone's debt crisis.

The euro had fallen to a one-year low of 81.57 pence in mid-February but has since recovered some ground given nascent signs of a recovery in the euro zone.

But investors remain comfortable adding to long sterling positions against the euro rather than the dollar.

"Sterling bulls may find more traction versus the euro instead of the dollar, with euro/sterling set to come under further downward pressure as the euro weakens anew. A break below 82 pence beckons," Credit Agricole (TLO: ACA.TI - news) said in a note.