Sterling volatile ahead of BoE deadline, fragile yen tests 1998 low

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By Joice Alves

LONDON (Reuters) - Sterling rose on Thursday in volatile trade as investors awaited the impending deadline for the Bank of England to end an emergency bond-buying programme.

A fragile yen languished near a fresh 24-year low, while markets were also on edge ahead of U.S. inflation data due later in the day for possible clues on how much higher the Federal Reserve will push interest rates.

Sterling was up 0.44% at $1.1147 at 1054 GMT in a volatile week. On Wednesday, the British currency fell to an almost two-week low but rebounded after the Financial Times reported that the BoE had signalled privately to lenders that it was prepared to extend its emergency bond-buying programme beyond Friday's deadline if market conditions demanded it.

However, the central bank later officially reiterated that its programme of temporary gilt purchases will end on Oct. 14

At the same time, the government said on Wednesday that it would not reverse its plans for wide-ranging tax cuts or reduce public spending, which have rocked the country's financial markets as it remains unclear how the moves will be funded.

UK pension schemes are racing to raise hundreds of billions of pounds to shore up derivatives positions before the BoE's Friday deadline.

Supporting sterling, longer-duration British gilt yields fell on Thursday, easing back from 20-year highs struck on Wednesday before the BoE bought 4.4 billion pounds ($4.9 billion) of debt at its daily reverse auctions - which are due to end on Friday.

"We can expect potential market take-up to continue to increase as market participants prepare for the BoE to exit the market. While the government shows little sign of turning back from the path of unfunded tax cuts, we can expect the market to focus on the risks of extended Gilt market volatility and potential contagion risks," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

Sterling volatility https://fingfx.thomsonreuters.com/gfx/mkt/zgvomqdzjvd/Sterling%20volatility.png

Elsewhere, the yen struggled against the U.S. dollar trading 0.1% lower at 146.8. This is a whisker away from an August 1998 low of 146.98 per dollar hit on Wednesday, and well past last month's low of 145.90 per dollar which prompted Japanese authorities to intervene to buy the yen.

The yen "has lost its safe haven appeal," said Rodrigo Catril, a senior currency strategist at National Australia Bank (OTC:NABZY).

"There's been this sense of cautiousness around that previous high (for dollar/yen) ... now they've punched through it, and therefore it feels like you have a little bit more room to keep going, because there hasn't been any intervention."

U.S. INFLATION IN FOCUS

The U.S. dollar index, which measures the greenback against a basket of peers including sterling and yen, edged 0.17% lower to 113.01, but was not too far from a 20-year high touched two weeks ago.

Investors were focusing on U.S. core inflation data due later today, which is projected to rise 6.5% year-on-year in September. Data showed on Wednesday that U.S. producer prices increased more than expected last month.

Minutes from the Federal Reserve's policy meeting last month showed that officials agreed they needed to raise interest rates to a more restrictive level - and then keep them there for some time - to meet their goal of lowering "broad-based and unacceptably high" inflation, even as the minutes contained a hint of a downshift in the pace of future monetary tightening.

Analysts at ING expected the dollar to continue to consolidate as the release of the September minutes revealed a still very hawkish Fed as "the cost of doing too little outweighed the cost of doing too much".

The euro rose 0.27% to $0.97285, while the antipodean currencies were nursing tiny gains after having fallen to fresh multi-year lows earlier in the week.