Sterling hits one-month high versus dollar, seen vulnerable

Mon Dec 3, 2012 6:49pm IST

* Market focus on UK mid-year fiscal statement on Wednesday

* UK PMI shows manufacturing slows less than expected

* MPC data expected to hold rates on Thursday

By Philip Baillie

LONDON, Dec 3 (Reuters) - Sterling rose to a one-month high against the dollar on Monday on demand from companies and sovereign investors, but it looked vulnerable before a gloomy mid-year fiscal statement on Wednesday.

Sterling gained 0.3 percent against the dollar to $1.6069 with traders citing demand for the pound from corporates to meet dividend payments. Traders said some Asian central banks were also buying the pound at lower levels with stop-loss sell orders seen below $1.6020.

The euro gained slightly against sterling, up 0.1 percent to 81.21 pence, trading close to a five-week high of 81.325 hit on Friday when German lawmakers approved an aid deal for Greece.

The euro zone currency got a slight boost after Spain formally requested the disbursement of European funds to recapitalise its crippled banking sector.

Finance Minister George Osborne gives his "autumn statement" to parliament later this week, after saying on Sunday that Britain would take longer to deal with its debt pile and that a recovery will be sluggish.

Economists speculate the independent Office for Budget Responsibility may lower growth forecasts and could also predict a target to have public sector debt falling as a proportion of national output by 2015/16 will be missed.

That in turn would endanger Britain's triple-A credit rating, which has provided sterling much support in the past as investors bought UK gilts while fleeing the euro zone crisis.

"Unless the Office for Budget Responsibility does surprise us on those forecasts, the risks are slightly weaker around the statement," said Paul Robson, currency strategist at RBS.

Morgan Stanley, whose FX positioning tracker showed investors had turned neutral on the pound from long positions, said in a note that Osborne is likely to opt to miss the fiscal targets rather than implement more austerity and both outcomes would weigh on sterling.

"The outlook for the UK economy has worsened over recent months and, as such, the government is unlikely to meet its fiscal targets," the note said.

Investors will also look out for signs of a pickup in the U.S. economy, with manufacturing data due out later. If the data beats expections, it could give the dollar some respite, one dealer said.

UK ECONOMY

Earlier, the pound barely reacted to better-than-expected UK manufacturing data. The UK manufacturing PMI data came in at 49.1, above expectations but below 50, indicating contraction.

"The nonchalant reaction of sterling reflects that the markets are not in the frame of mind to expect any policy amendments in the near term," said Simon Smith, chief economist at FxPro.

The Bank of England's Monetary Policy Committee (MPC) will vote on Thursday on whether to increase the bank's asset purchase scheme known as quantitative easing (QE), although most economists expect it to hold fire.

The Bank has held interest rates at record lows of 0.5 percent since March 2009, and is widely expected to maintain total asset purchases at 375 billion pounds at its next meeting on Dec. 6.

But expectations of further easing by the BoE are building, especially given its biggest trading partner is in the midst of a recession. That is likely to see sterling struggle to retain gains against the euro in the near term.

A slightly stronger euro was helped on Monday by unwinding of short euro positions as yields on euro zone government bonds fell and Greece said it would conduct its bond buy-back programme to trim the country's ballooning debt.

"Euro/sterling has some good upward momentum, it has been more of a euro story moving it higher on the crosses - it has some strong technichal momentum behind it," said Elsa Lignos, currency strategist at RBC Capital.

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