February 15, 2011 / 8:58 AM / in 7 years

Sterling up ahead of inflation data, rate talk helps

* Cable GBP=D4 holds above $1.60 ahead of CPI data

* CPI above 4 percent to boost rate hike expectations in UK

* Euro/pound slips on East European selling

LONDON, Feb 15 (Reuters) - Sterling inched up on Tuesday, holding above key technical levels ahead of UK inflation data that could bolster expectations for an interest rate rise in the coming months.

Data at 0930 GMT is forecast to show annual consumer price inflation surged to 4.0 percent from 3.7 percent in December, its highest level since November 2008 and double the central bank’s target. ECONGB

Bank of England (BOE) Governor Mervyn King will be forced to write another letter to the government explaining what remedial action will be taken. That letter will be published at 1030 GMT, an hour after the inflation figures are released.

“UK futures markets are already factoring in two to three 25 basis points rate hikes by year end and a figure anywhere above 4 percent could well bring forward the date of any potential first hike,” said Michael Hewson, market analyst at CMC.

“The pound continues to remain stubbornly well supported below the $1.6000 level. The inability to close below $1.6000 continues to frustrate sterling bears and keeps the pound susceptible to rallies back above $1.6120.”

Sterling was 0.1 percent higher against the dollar at $1.6050 GBP=D4. It held above above the $1.60 level, having closed above there in the past two sessions. Traders cite stop-losses around $1.5980 and then below $1.5960.

Technical analysts said a drop below $1.60 could pave the way for a move towards $1.5920, the 38.2 percent retracement of the pound’s December-February rally.

Against a subdued euro, sterling held the previous session’s gains. The euro was down 0.06 percent at 84.02 pence, EURGBP=D4, not far from last week’s low of 83.89 pence. Traders said Eastern European names sold the pair early in the session amid fresh worries about Europe’s banking system and lingering concerns about peripheral debt.

Those worries have led investors to rein in expectations of a near-term interest rate rise by the European Central Bank.

In contrast, expectations the Bank of England will raise rates by mid-year have grown. The BoE left rates on hold last week, but markets are almost fully priced for a hike in May and a further two rises by the end of the year. BOEWATCH

Analysts say after Tuesday’s inflation data, the focus will turn to the BoE’s inflation report on Wednesday, where it is expected to revise up near-term inflation projections. [ID:nLDE71A1JW].

Until now the BoE has been confident price pressures would be temporary, and a shift in that view would add to expectations for a rate hike in the near term.

However, there are concerns about the general weakness of the UK economy and more data this week, including jobs data on Wednesday and retail sales figures on Friday, will be closely watched.

The economy contracted in the fourth quarter of 2010 and concerns are growing that job losses will mount, hurting consumer spending at a time when the government is also cutting expenditure.

“My feeling is everyone will wait for the BoE inflation report on Wednesday which will be very hawkish,” said Chris Walker, currency strategist at UBS. “Still there is the prospect of stagflation and that is bearish for sterling.” (Editing by Patrick Graham)

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