March 31, 2011 / 1:15 PM / 9 years ago

Sterling at 5-mth low vs euro as rates in focus

* Euro rises above 5-month high versus sterling

* Markets could next test last October’s high of 90 pence

* Sterling helped by data, talk of fix-related demand

(updates, adds quote)

By Brenda Goh

LONDON, March 31 (Reuters) - The euro rose to a five-month high against sterling on Thursday, boosted by expectations that interest rates in Europe will rise faster than in the UK and talk of month-end demand from central banks.

The euro EURGBP=D4 rose to a high of 88.485 pence, up 0.6 percent on the day with offers seen at 88.50/60 pence, traders said. Analysts say markets may now try to push the common currency towards last October’s high of 90 pence as investors focus on growing interest rate differentials between the euro zone and UK and concerns about a fragile British economy.

“The market will find it hard to resist going to see how euro/sterling trades around 90 pence, because the trading breaks this year haven’t been the most profitable thing to do, but it doesn’t mean people won’t try,” said Paul Robson, currency strategist at RBS Global Banking.

“Further gains look likely while the market embraces the more positive aspects of the euro area periphery story, ECB tightening and softening UK data,” he said.

The euro EUR= was broadly firmer as above-forecast euro zone inflation on Thursday cemented the case for higher interest rates from the European Central Bank (ECB). Markets see the tightening cycle starting in April. [ID:nLDE72T1ZS]

Traders said month-end and quarter-end flows are building up on banks’ orderbooks, with most volumes likely to kick in around the 1500 GMT fix, particularly for the euro.

“We have an Asian central bank order to buy euros at 1500 GMT and it looks like we are not alone,” said a trader in London.

Traders said sterling was also supported against the U.S. dollar by talk of good fix-related demand but that was yet to materialise, forcing some investors to unwind long positions.

European shares .FTEU3 have lost more than three percent this month, while Britain's FTSE 100 .FTSE has also shed some ground, sparking demand from U.S. investors to sell the dollar and rebalance their portfolios.

Sterling GBP=D4 was up 0.07 percent against the dollar at $1.6085, holding above a two-month low of $1.5937 hit earlier this week. A sustained break and close above the 55-day moving average around $1.6100 would signal a re-test of the $1.6180/90 area.

A speech from Bank of England policymaker David Miles did little to move the pound as he largely steered clear of monetary policy issues, although he said the BoE would need to recalibrate the link between its interest rate and mortgage rates. [ID:nL9E7EG08N]

Earlier, data showed UK house prices rose unexpectedly for the second consecutive month in March. Data from mortgage lender Nationwide showed house prices rose 0.5 percent this month, defying economists’ forecasts for a fall of 0.1 percent.

It comes a day after data showed service sector output rebounded in January. Another survey on Wednesday showed retail sales rose in March. [ID:nLDE72T0QC] (Additional reporting by Anirban Nag; editing by Stephen Nisbet)

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