Sterling hits 1-mth high vs dollar, caution on UK outlook

Tue Dec 4, 2012 9:06pm IST

* Sterling rises past stops to hit one-month high vs dollar

* Long positions could be threatened by soft UK data

* Real money investors cited as buyers of sterling

By Philip Baillie

LONDON, Dec 4 (Reuters) - Sterling struck a one-month high against a broadly weaker dollar on Tuesday as reported buying by long-term investors outweighed a weaker-than-forecast survey of British construction activity.

The construction PMI showed activity shrank slightly in November and that confidence about the next 12 months fell to its lowest in almost four years.

The figures were a blow to the government the day before finance minister George Osborne's mid-year budget statement.

But the pound showed little reaction and later hit a one-month high of $1.6131, its highest level since Nov. 2, after triggering stop-loss buy orders just above $1.6120.

Sterling was last trading up 0.15 percent on the day at $1.6110, with options barriers reported at $1.6150.

"Sterling looks fully valued up at these levels unless we see further topside impetus given by the services PMI on Wednesday," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

"Sterling is holding up but I would not want to chase it much higher. We had been seeing risk sentiment better in the morning that might have helped sterling/dollar."

A Reuters poll forecast a services PMI reading of 51.1 for November, which would be a slight pick-up in growth compared with 50.6 the previous month and could lift sterling.

"If we get another surprise in the PMI data then we would expect sterling/dollar to move higher," said Kathleen Brooks, research director at Forex.com.

"As long as the environment remains stable and positive for risk assets we could target the $1.63 September highs," she added, referring to the one-month outlook for sterling.

Earlier on Tuesday, data showed British retail sales edged up in November, though by less than analysts were expecting.

AUTUMN STATEMENT

Investors will also focus on what Osborne will say in his "autumn statement" in parliament on Wednesday. There is speculation that he is likely to miss his debt and growth targets, raising risks to Britain's triple-A credit rating.

"We tend to be seeing more of the same from Osborne, it is probably going to increase speculation around the AAA credit rating," said Richard Driver, analyst at Canton FX.

"Growth is going to be poor in the fourth quarter which is bringing the rating agencies into play. More of the same is not necessarily good for sterling."

The pound fell against the euro, which was up 0.2 percent at 81.25 pence, not far from the five-week high of 81.325 pence it posted last week.

The euro gained broad support on expectations a Greek debt buyback deal, announced on Monday, will be implemented smoothly although rises against the pound were expected to be limited.

Forex.com's Brooks said any euro gains were likely to be limited around the 81.65 pence October high ahead of a European Central Bank meeting on Thursday, given the risk policymakers may revise down euro zone growth forecasts.

The Bank of England's Monetary Policy Committee meets on the same day and is widely expected to keep asset purchases unchanged at 375 billion pounds and rates on hold at a record low of 0.5 percent.

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