March 20, 2012 / 4:27 PM / 6 years ago

Sterling dips from recent highs, focus on budget

(recasts, adds quote, updates prices)

* Sterling slips vs dlr after three sessions of gains

* UK budget on Weds could boost sterling, analysts say

* BoE minutes also due on Weds

By Anirban Nag

LONDON, March 20 (Reuters) - Sterling slipped on Tuesday but kept close to its recent highs after UK inflation eased less than expected in February, lowering the chances of further monetary easing in coming months.

The pound has been underpinned by a run of better data, pushing it to a 13-month peak against a trade-weighted basket of currencies on Monday. Analysts expect it to resume its uptrend if there are more signs of economic improvement, and some expect it to benefit from the UK budget on Wednesday.

“Sterling could outperform if there is a feeling that the UK budget is pro-business and pro-growth,” said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank. She expects the pound to gain further in the second half of the year as the economy improves.

Finance minister George Osborne will present his 2012/13 budget on Wednesday at a time when the economy is showing signs of starting to recover. The independent Office for Budgetary Responsibility is expected to raise its growth forecasts which will be released alongside the budget.

Inflation is slowing, though not at the pace the central bank had expected.

Latest data showed British annual consumer price inflation fell to 3.4 percent in February from 3.6 percent in January, the lowest level in more than a year but still above the consensus forecast for a drop to 3.3 percent.

If price pressures do not ease as much as the central bank expects it would be harder to justify further easing, which is usually seen as a drag on the pound.

Against a broadly higher dollar, sterling was down 0.2 percent at $1.5854, outperforming currencies like the Australian and New Zealand dollars which fell more than 1 percent. The UK currency has gained for the past three sessions and hit a two-week high on Monday.

Analysts said a further rise could be in store if sterling closes above its 200-day average, a key chart level, currently around $1.5859. The near-term target for the pound is this week’s high of $1.5915, then the Feb. 29 high of $1.5993, traders said.

The euro rose 0.2 pence to 83.425 pence, recovering from a session low of 83.16 pence struck after the UK inflation data. The common currency fell to a one-month low of 82.83 pence on Monday.

UK BUDGET JUGGLERY

Some analysts say sterling could strengthen if Osborne announces measures to support growth in a fiscally neutral budget. The budget is expected to show government borrowing next year falling below 100 billion pounds for the first time since 2008/9, with austerity measures likely to remain the cornerstone.

“The expectations are for the Chancellor of Exchequer (finance minister) to announce lower tax rates, more generous tax allowances which together with the credit easing scheme announced yesterday should stimulate domestic demand and thus boost growth,” Citi analysts said in a note to clients.

But they warned that key to whether sterling can sustain a bounce will be the response of ratings agencies, which may express concern if the budget focuses too much on growth-boosting measures at the expense of deficit-reduction efforts.

BoE minutes are also due for release on Wednesday and will be watched for hints on whether policymakers will resort to another round of asset purchasing and whether they are becoming more concerned about inflation given high oil prices.

“Indeed, the stickiness in inflation should prompt the BoE to endorse a wait-and-see approach for 2012,” said David Song, currency analyst at DailyFX. “We should see sterling regain its footing ahead of the Bank of England Minutes as the central bank softens its dovish tone for monetary policy.”

additional reporting by Jessica Mortimer; editing by Ron Askew

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