Sterling gains as CPI data suggests BoE to hold policy

Tue Dec 18, 2012 5:09pm IST

* Sterling hits highest since late September versus dollar

* UK Nov annual CPI holds at 2.7 pct, above forecasts

* High inflation makes further QE from BoE less likely

* Traders cite year-end demand to buy pounds

By Jessica Mortimer

LONDON, Dec 18 (Reuters) - Sterling rose to its highest in more than two and a half months against the dollar on Tuesday after high UK inflation added to expectations the Bank of England will avoid further easing for now.

The pound rose as high as $1.6226, its strongest since late September. More gains could enable it to target the Sept. 28 peak of $1.6273 and the mid-September high of $1.6310. It was last up 0.3 percent on the day at $1.6215.

Traders said sterling was also lifted in thin trade by end-of-year demand to buy the currency from companies looking to hedge and from central banks.

UK annual consumer price inflation unexpectedly remained at 2.7 percent in November after a surprise jump the month before, which is likely to reinforce the central bank's concerns about price pressures proving persistent. The market consensus had been for inflation to dip to 2.6 percent.

"The idea that there may be no more QE for now has impacted sterling at the margin," said Michael Derks, strategist at FXPro.

He added that sterling was also benefiting by default because of expectations of aggressive easing measures in Japan hurting the yen and last week's decision by the U.S. Federal Reserve to loosen policy further weighing on the dollar.

"Sterling has been doing OK because it is one of the least bad of the major currencies. It is also benefiting from a perkier performance from the euro, but volumes are low and relatively small flows are having a greater impact."

A Reuters poll conducted last week showed economists expect UK interest rates to stay on hold at a record low 0.5 percent until at least mid-2014.

Investors will look to Bank of England policy meeting minutes on Wednesday for clues on the chances of UK policymakers authorising more bond buying.

Quantitative easing is usually negative for a currency as it increases its supply.

"The (CPI) print could make it more difficult for the BoE to extend its accommodative stance from here," analysts at Citi said in a note to clients.

They added, however, that the impact on the pound may be short-lived, with sterling likely to track movements in the euro closely. Dips in euro/sterling "could still attract some buyers for now".

The euro was down 0.1 percent at 81.27 pence, off Monday's near two-month high of 81.55 pence.

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