Sterling climbs on euro zone optimism, risks selling

Mon Nov 28, 2011 9:24am GMT

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LONDON, Nov 28 (Reuters) - Sterling rose against a broadly weak dollar on Monday, but it remained near a six-week low and faces selling pressure this week from expectations the government will cut its forecast for economic growth.

The dollar fell as European stocks rose and investors picked up currencies perceived to be riskier on hopes that EU leaders are pushing toward more radical action to resolve the debt crisis.

Italian bond yields fell after an Italian newspaper on Monday reported that the International Monetary Fund was preparing an aid package for Italy, but the amount cited was far beyond the Fund's existing loan stock and the IMF said it was not in discussions with Rome authorities.

The pound tracked gains in the euro versus the dollar, but many expect sterling may suffer in a week of big domestic events which could sour sentiment on the UK currency.

Analysts expect Bank of England Governor Mervyn King to reiterate that the central bank is prepared to buy more assets from the market to prop up the economy if necessary when he addresses the Treasury Select Committee later in the day.

That policy of quantitative easing involves flooding the market with pounds and has already weighed on sterling.

Before King's speech comes a reading of UK retail sales from the Confederation of British Industry, which is expected to show a further deterioration in November as consumer confidence remains sluggish.

The UK government's autumn budget statement on Tuesday is expected to contain a significant cut to the country's economic growth forecast given ongoing signs that the UK economy is struggling to recover.

"If we get a soft CBI reading and further dovish comments from King at the Treasury Select Committee, and if we get some pretty downbeat growth numbers tomorrow, that all plays into the assumption that, if we don't get continued risk support, sterling/dollar still looks vulnerable," said Jeremy Stretch, currency strategist at CIBC.

In early London trade, sterling rose half a percent on the day to $1.5520. Despite its gains, the pound hovered in range of a low of $1.5423 touched late last week, its weakest since early October.

The euro rose 0.3 percent to 86.04 pence.

Market participants warned that a nationwide strike of public sector workers scheduled for Wednesday may also sour sentiment for UK assets among foreign investors if they call into question the future success of dramatic austerity measures.

Other signs also show the risk of more sterling selling this week. The latest data on IMM positioning shows speculators increased their bets to sell the pound, suggesting that downside momentum is building. (Reporting by Naomi Tajitsu; editing by Patrick Graham)

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