Euro hits one-week high vs struggling pound as ECB steers clear of QE

By Anirban Nag

LONDON, Oct 2 (Reuters) - The euro rose to a one-week high against the British pound on Thursday after European Central Bank chief Mario Draghi gave no indication the bank is planning an imminent stimulus programme involving buying of government bonds.

Traders said along with the ECB's unwillingness to announce a specific target for its purchases of secured debt and bundled loans, Thursday's actions raised questions about whether the current programmes are sufficient to expand the ECB's balance sheet at a faster pace and drive down the currency.

Expansion of a central bank's balance sheet, especially through asset purchases, leads to a flood of currency in the system and drives down its value.

As such, many investors who had positioned for some hint of quantitative easing or a target for asset backed securities and covered bonds were left disappointed. That led to a bout of short covering which saw the euro hit a high of 78.505 pence, its highest since Sept. 24.

Most traders, though, were unconvinced about the euro's rally.

"We think it's only a temporary relief for the single currency though as there remains a real chance that the ECB will act on monetary policy again before the end of the calendar year," said Alex Edwards, head of the corporate desk at UKForex.

"The inflation outlook is unlikely to improve significantly anytime soon and as the divergence between the ECB's future policy direction and the Bank of England's/Federal Reserve increases, the euro looks set to lose more ground across the board over the medium term."

Sterling was also lower against the dollar, trading near a three-week low of $1.6119. It got only brief support from a bullish survey of UK construction sector purchasing managers that underlined how Britain's economy is outpacing its peers in the euro zone.

Economists predict the UK economy will grow by 2.5-3.0 percent for the next three years, but there have been more doubts in the past month both about the UK political backdrop and the durability of the pickup.

Scotland's vote against secession has pushed constitutional change onto the agenda in Britain. Defections from the ruling Conservatives to anti-EU party UKIP have raised the prospect of a referendum on whether to take the country out of the trading bloc after next year's national election.

"Some of the political uncertainty that could crop up in the UK in coming months is likely to keep sterling capped against the dollar," said Jonathan Webb, head of FX strategy at international trading house Jefferies.

"A much cleaner bet will be to sell euros against sterling."

Expectations that the BoE would raise rates early next year have underpinned sterling for the past 15 months, especially against the euro. But any sign the BoE will hold off would be likely to hurt the pound.

The construction survey showed activity grew at one of the fastest rates on record last month, though slower rises in new orders and employment raised questions about the durability of the upturn. (Additional reporting by Patrick Graham; Editing by Hugh Lawson (Other OTC: LWSOF - news) )