* Sterling hits highest since late September versus dollar
* UK Nov annual CPI holds at 2.7 pct, above forecasts
* High inflation makes further QE from BoE less likely
* Dovish bias in minutes could show short-term weakness
By Philip Baillie
LONDON, Dec 18 Sterling rose to its highest in
more than two and a half months against the dollar on Tuesday
after stubborn UK inflation added to expectations the Bank of
England will avoid further easing for now.
The pound rose to as high as $1.6226, its strongest
since late September. More gains could enable it to target the
Sept. 28 peak of $1.6273 and the mid-September high of $1.6310.
It was last up 0.1 percent on the day at $1.6215.
Traders said sterling was also lifted in thin trade by
year-end demand for the currency from companies looking to hedge
and from central banks.
UK annual consumer price inflation unexpectedly remained at
2.7 percent in November after a surprise jump the month before,
which is likely to reinforce the central bank's concerns about
price pressures proving persistent. The market consensus had
been for inflation to dip to 2.6 percent.
Some analysts said the pound could lose some ground if the
minutes from the bank's latest Monetary Policy Committee (MPC)
meeting show a more dovish bias.
The minutes are due on Wednesday and could mirror earlier
comments from Bank of England Governor Mervyn King that the UK
will struggle to boost exports as long as the pound remains
"Sterling has been quite resilient in the last few
sessions," said Audrey Childe-Freeman, currency strategist at
BMO Capital Markets.
"The inflation numbers were a little bit of a non-event, MPC
minutes and retail sales will be the focus this week, and if the
minutes are on the dovish side ... we could see sterling more
BMO's Childe-Freeman said if the pound did show weakness
after the MPC minutes, it could be an opportunity to buy, given
sterling's recent momentum against the dollar.
Analysts at Citi said sticky inflation would make it more
difficult for the BoE to extend asset purchases and added
sterling was likely to track movements in the euro closely.
The euro was flat against the pound at 81.23
pence, trading down from Monday's near two-month high of 81.55
pence. Against the dollar, the euro was near a 7-1/2
BENEFITING BY DEFAULT
Analysts said sterling was also benefiting by default from
expectations of aggressive easing measures in Japan, which would
hurt the yen, and from last week's decision by the U.S. Federal
Reserve to loosen policy further, which was weighing on the
"Sterling has been doing OK because it is one of the least
bad of the major currencies. It is also benefiting from a
perkier performance from the euro, but volumes are low and
relatively small flows are having a greater impact," said
Michael Derks, strategist at FXPro.
With the BoE likely to be on the sidelines, sterling could
benefit from investors seeking better returns in a world where
major central banks have cut rates to zero or near zero.
A Reuters poll conducted last week showed economists expect
UK interest rates to stay on hold at 0.5 percent until at least
Still, investors will look to the minutes for clues on the
chances of UK policymakers authorising more bond buying.
Quantitative easing or expectations of more asset purchases by
the central bank is usually negative for a currency as it
increases its supply.
"The idea that there may be no more QE for now has impacted
sterling at the margin," Derks said.