Sterling holds near 5-wk high vs dollar with Fed meeting ahead

Wed Dec 12, 2012 2:30pm IST

* More dovish FOMC easing could weaken dollar

* Sterling could bounce to September highs

* Unemployment data could show UK weakness

By Philip Baillie

LONDON, Dec 12 (Reuters) - Sterling held near a five week high against the dollar on Wednesday ahead of an expected expansion by the Federal Reserve if its asset purchase scheme, potentially weakening the U.S. dollar broadly.

The Fed's Open Market Committee (FOMC) is expected to announce a fresh round of bond buying as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government's budget.

Traders said the pound could extend gains to hit early November highs of $1.6176 and even higher if the Fed opts for a more aggressive quantitative easing than the $45 billion a month of asset purchases most economists are expecting.

Investors, however, will also look to UK jobs data due at 0930 GMT for signs of weakness in the economy after the Olympics fillip, potentially weakening the pound. A Reuters forecast shows the unemployment rate is expected to be unchanged at 7.8 percent.

"The Fed has to deliver a lot for the dollar to get a durable weakening, a more dovish position (than $45 billion) could see sterling head back towards the (September high) around the $1.63 level in the coming weeks," said John Hardy, FX strategist at Saxo Bank.

Sterling was flat on the day $1.6105, off a 5-week high of $1.6131 hit last week, with charts showing support around the 55- and 50-day moving averages at $1.6024 and $1.6032 respectively.

Against the euro, sterling held flat at 80.74 pence. The euro hit a near three-week low of 80.35 pence on Monday on political turmoil in Italy. Near-term support was seen at the 55-day moving average at 80.57 pence.

With the euro zone struggling with a sharper slowdown than the UK and austerity and fiscal tightening likely to weigh on growth for years, BNP Paribas said model suggested a short euro/sterling position.

"We have initiated a quant-based euro/sterling short trade recommendation at 80.65 pence, targeting 79.15 pence and with a stop at 81.40 pence," they said in a note.

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