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Sterling edges up vs euro after UK CPI; focus on budget
March 20, 2012 / 12:42 PM / 6 years ago

Sterling edges up vs euro after UK CPI; focus on budget

* Sterling cuts earlier losses vs euro after UK CPI data

* Inflation eases less than forecast in Feb

* UK budget on Weds could boost sterling, analysts say

* BoE minutes also due on Weds

By Jessica Mortimer

LONDON, March 20 (Reuters) - Sterling edged up against the euro on Tuesday after UK inflation eased less than economists had expected in February, slightly reducing the risk of the Bank of England implementing more monetary easing later this year.

The pound has been underpinned recently by a run of better data, rising to a 13-month peak against a trade-weighted basket of currencies on Monday. Analysts expect it to extend gains if there are more signs of economic improvement, while some expect it could benefit from the UK’s annual budget on Wednesday.

British annual consumer price inflation fell to 3.4 percent 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 make it tougher to justify further quantitative easing, which is usually seen as negative for the pound.

The euro dipped 0.1 percent to 83.20 pence, having erased earlier gains to hit a session low of 83.16 pence after the data. This brought it closer to a one-month low of 82.83 pence hit on Monday. However, traders said reported bids above 83.00 pence could limit its falls.

Many analysts believe the single currency has begun to break below its recent range against sterling, which could see it test the early January low of 82.22 pence. It remained stuck below its 55-day moving average around 83.45 pence.

“I would still be a seller of euro/sterling on rallies,” said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank. However, the euro’s falls would be limited to “not much below 82 pence”.

“Sterling could outperform if there is a feeling that the UK budget is pro-business and pro-growth,” she said, adding she expected the pound to gain further in the second half of the year as the economy improved.

Against a broadly firmer dollar, sterling was down 0.35 percent at $1.5836. Analysts said the pound could gain if it pushes above its 200-day average, a key chart level, which is currently around $1.5859.

However, investors remained wary about the fragility of the UK economy. A survey on Tuesday showed British factory orders weakened more than forecast in March, although firms expected to increase output in the coming months.

“Sterling looks solid but uninspiring,” said Kit Juckes, currency strategist at Societe Generale, adding that gains against the dollar were likely to be capped below $1.60.


The main focus for sterling this week will be the annual UK budget, as well as Bank of England minutes on Wednesday.

Some analysts say sterling could gain a boost if UK finance minister George Osborne announces some measures to support growth in a fiscally neutral budget, still leaving the country on course to reduce a hefty deficit.

The budget is expected to show government borrowing next year falling below 100 billion pounds for the first time since 2008/9, while the growth outlook for 2012 could be nudged higher.

“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 will be watched for hints on whether the policymakers will resort to another round of asset purchasing and whether they are becoming more concerned about the outlook for inflation given high oil prices. (editing by Ron Askew)

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