By Ruth Pitchford
LONDON, Jan 10 (Reuters) - Sterling fell against the dollar
and euro, European equities firmed and government bonds weakened
as investors braced for crucial central bank decisions on
British and euro zone interest rates on Thursday.
The European Central Bank is widely expected to keep rates
on hold at 4 percent, torn between the need to fend off
inflation driven by rising food and fuel prices, and
recessionary risks from a global credit crisis.
Sterling was under pressure after recent signs of UK
consumers curbing their spending stirred expectations for the
Bank of England to announce a cut in interest rates at 1200 GMT.
But European shares rose early on Thursday after British's
third-largest supermarket chain J Sainsbury <SBRY.L> helped
soothe some of the retail concern by meeting analysts'
expectations with its quarterly trading figures.
Shares were also buoyed after a broad push into traditional
defensive sectors such as healthcare buoyed U.S. stocks.
"Quite frankly, we want to see some better macro data and
also company results are starting to come out now," said Edmund
Shing, a strategist at BNP Paribas in Paris.
"We want to see some reassurance that the world is not going
to hell before we can bounce back more meaningfully."
European government bond trading was cautious in the run up
to the European Central Bank's decision at 1245 GMT and its
press conference at 1330 GMT, while a big Spanish bond auction
will also weigh on the market.
RETAIL WORRIES
In the stock markets, shares in Sainsbury rallied by more
than 7 percent, putting them on track for their largest one-day
rise since last April.
The FTSEurofirst 300 index <> of top European shares
gave up some early gains to trade up around 0.2 percent at
1,450.86 points, after falling 1.2 percent on Wednesday.
But MSCI's broad measure of world stock indices
<.MIWD00000PUS> had eased 0.2 percent to 388.46 by 0915 GMT,
while its emerging market index <.MSCIEF> was down nearly 0.6
percent at 1,220.1.
Retailers are one of the worst performing corporate sectors
so far in 2008 as fear of a slowdown in consumer spending in
Britain and the United States has weighed heavy.
Expectations the Bank of England will follow up on last
month's rate cut took sterling to fresh record lows beyond 75
pence per euro <EURGBP=> on Thursday, even though most
economists in a Reuters poll last week [] thought the UK
benchmark rate would stay on hold this time at 5.5 percent.
Against the dollar, the pound fell as low as $1.9542, its
weakest since last March <GBP=>.
The euro edged up 0.1 percent to $1.4674 <EUR=>, above a
one-week low of $1.4638 hit the previous day.
"Sterling is guaranteed to move whatever happens ... But
given the sell off in sterling, and given the way the market's
priced in a rate cut, it seems that sterling has more to gain
from unchanged rates than it has to lose from lower rates,"
said Steve Barrow, currency strategist at Bear Stearns.
Expectations for a UK cut have been boosted by a raft of
weak retail reports, including a poor set of earnings from
Britain's biggest clothing retailer Marks and Spencer <MKS.L> on
Wednesday.
In the commodity markets, where inflationary pressures are
complicating central bank decision-making, oil prices held
steady as a rise in U.S. fuel stocks countered a fall in crude,
while fears over supply disruptions in the Middle East and
Nigeria were balanced by the dim outlook for the U.S. economy.
Gold softened in volatile trade but held near a record high
hit the previous day, with dealers expecting the market to
undergo a correction before it hit the $900 an ounce target.
(Editing by Mike Peacock)
