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Sterling dips as market eyes UK inflation data
March 20, 2012 / 9:18 AM / 6 years ago

Sterling dips as market eyes UK inflation data

* Sterling dips, off 13-month trade-weighted high hit on Mon

* Markets await CPI data; BoE minutes, budget also eyed

* Annual CPI inflation seen falling to 3.3 pct in Feb

By Jessica Mortimer

LONDON, March 20 (Reuters) - Sterling dipped on Tuesday, reversing some of the previous day’s gains as the safe-haven dollar gained ground and investors took stock ahead of UK inflation data at 0930 GMT.

Consumer price gains are expected to fall to 3.3 percent year on year in February from 3.6 percent the previous month.

Analysts said a higher than expected number would boost the pound as it would reduce the chances of further monetary easing by the Bank of England while a weaker reading may be seen as slightly negative.

Sterling 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.

The UK currency closed above its 200-day moving average against the dollar around $1.5860 on Monday. This is a key chart level and technical analysts said the pound could rise further if it manages to hold its gains.

It fell back on Tuesday, however, losing 0.3 percent to $1.5853, with the dollar firming as equities turned lower and investors sought safer assets.

Investors remain wary because the UK economy is still fragile and there is still a chance the Bank of England could implement further quantitative easing later in the year.

“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.

“Euro/dollar may need to break below $1.30 to get euro/sterling moving lower,” he added.

The euro was up 0.1 percent at 83.37 pence, off a one-month low of 82.83 pence hit on Monday, while trade-weighted sterling fell to 81.5 from a high of 81.8 on Monday.

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.

Also awaited on Tuesday will be a Confederation of British Industry survey on manufacturing, which is expected to show a further fall in orders in March.

UK BUDGET

The main focus for sterling this week will be the annual UK budget and 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.

“Investors ... seem to position themselves for some more sterling upside ahead of the Budget on Wednesday,” Citi analysts said in a note to clients.

“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.”

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.

Analysts at Morgan Stanley also said the pound could benefit from the budget and on Monday recommended selling the euro against the pound, with a target of 81.40 pence and a stop at 83.90 pence.

But Citi analysts 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 its efforts to reduce the deficit.

BoE minutes will also be watched for hints on whether the central bank will resort to another round of asset purchasing. Quantitative easing (QE) is considered to be negative for a currency as it involves flooding the economy with cash. (Editing by John Stonestreet)

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