Sterling up after retail sales data, but euro zone weighs

Thu Nov 17, 2011 12:04pm GMT

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* Sterling at session high after stronger retail sales

* Gains tempered as poor Spanish auction supports dollar

* Pound likely to strengthen vs euro, gilt inflows help

By Nia Williams

LONDON, Nov 17 (Reuters) - Sterling rose versus the dollar on Thursday after unexpectedly strong retail sales data provided some rare good news on the economy, although the figures did little to alter the overall view that the UK outlook remained grim.

The pound struck a session high of $1.5793 after data showed UK retail sales rose 0.6 percent in October, defying predictions of a fall.

But it struggled to hold those gains as poor demand at a Spanish debt auction fuelled concerns the euro zone debt crisis is spiralling out of control, pushing investors towards the safety of the highly liquid U.S. dollar.

Sterling last traded up 0.1 percent on the day at $1.5747, holding above a four-week low of $1.5692 hit early on Thursday morning. Some traders said cable below $1.57 was considered good value and also cited an options expiry at $1.5750.

"The retail sales data is better news but the broader picture still remains that there are significant risks to consumer spending ahead. It's best to take this month's data with a pinch of salt," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

"We are looking for the pound to continue to grind lower against the yen and the dollar. Cable in the low $1.50s is our outlook for the next three to six months."

Sterling had slipped on Wednesday after the Bank of England cut UK growth forecasts in its quarterly inflation report, leaving the door open for quantitative easing -- which involves flooding the market with pounds to stimulate growth.

Overnight data showing UK consumer confidence fell to a record low in October also reinforced the gloomy economic picture.

STERLING SUPPORT VS EURO

Despite a bleak outlook for the UK economy, market players said the pound was likely to hold firm against the euro, given concerns of increasing contagion among euro zone sovereigns.

Ten-year Italian government bond yields remain above the critical 7 percent level, while the Spanish yield traded within sight of that level following the lacklustre auction.

The euro was last down 0.1 percent on the day versus sterling at 85.48 pence, remaining in a range concentrated around the 200-week moving average at 85.53 pence.

Technical analysts said a clear break below that level would open the door to a test of the 8-1/2 month low of 84.86 pence hit last week.

Some market players said investors looking to cut exposure to the euro zone were providing strong demand for UK gilts, which in turn was helping support the pound.

"In all FX markets at the moment we are looking just as much at the bond markets for direction. What's going on in the bond markets is going to cause the euro to meander lower," said Kathleen Brooks, research director at Forex.com.

"We do not have any stress in the UK bond market because gilts are a safe haven, and that inflow into gilts should boost the pound. The bond market will remain a safe haven of sorts because of a lack of other options." (Editing by Susan Fenton)

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