Sterling falls to nine-and-a-half low versus euro, CPI in focus

LONDON Mon Jan 14, 2013 5:18pm GMT

A generic picture of a some British sterling money in coins and bank notes. BANKG REUTERS/Catherine Benson CRB

A generic picture of a some British sterling money in coins and bank notes. BANKG

Credit: Reuters/Catherine Benson CRB

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LONDON (Reuters) - Sterling hit a 9-1/2 month low against a broadly stronger euro on Monday as concerns about UK economic growth weighed on the pound.

The next focus for sterling investors is consumer price index data on Tuesday, expected to show annual inflation holding at 2.7 percent. A higher-than-forecast reading could knock the pound by further reducing UK consumer spending power.

Many strategists said the pound could also extend losses if concerns about the faltering economy increase speculation of more monetary easing from the Bank of England and a credit rating downgrade in coming months.

A more positive tone from European Central Bank President Mario Draghi at a news conference last week has helped lift the single currency broadly in recent sessions.

The euro rose 0.6 percent on the day to hit 83.245 pence, its strongest level since early April 2012, with market players citing corporate buyers.

"(There is a) risk CPI could start to edge up ... That and the backdraft from the weaker reading from the NIESR last week keep sterling somewhat on the defensive," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Sterling has been on the back foot since Friday when figures from the National Institute of Economic and Social Research suggested the economy shrank 0.3 percent in the fourth quarter of 2012.

Data released on the same day showed UK industrial and manufacturing output fell more than forecast in November, increasing the likelihood the economy contracted in the final quarter of last year.

Against the dollar, sterling dipped 0.5 percent to $1.6058, breaking below support from the 100-day moving average around $1.6067.

Those losses and the fall against the euro pushed sterling's trade-weighted index to 82.5, its lowest since mid-June.

CIBC's Stretch said he would not be surprised by further sterling selling unless CPI figures were more benign than forecast and retail sales later in the week beat expectations.

He also said a close below $1.6065-67 would leave the pound susceptible to further falls versus the dollar, with potential to test the $1.60 level reached last week.

In a note, Barclays strategists recommended expressing a negative view on sterling through the options markets, by buying three-month risk reversals betting sterling will weaken.

SAFE-HAVEN OUTLOOK

The euro has rallied broadly since ECB President Mario Draghi gave no hint of future interest rate cuts at a news conference last week, while robust demand at a Spanish bond auction also reassured investors.

Some analysts said speculation over whether the government will call a referendum on Britain remaining in the European Union was also unnerving sterling investors.

RBS currency strategist Paul Robson said investors who had bought sterling last year as a safe haven from the euro zone debt crisis were unwinding those bets as concerns about the currency union breaking up abated.

"If the market is truly embracing the positives around the European outlook then the positions to be taken off are those short euro/sterling positions," Robson said, adding the euro could rally up to 84 pence.

(Additional reporting by Nia Williams; editing by Stephen Nisbet)

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