April 16, 2013 / 3:17 PM / 7 years ago

Sterling falls versus euro, UK economy seen fragile

LONDON (Reuters) - Sterling hit a four-week low against a broadly firmer euro on Tuesday and looked vulnerable to further weakness on concerns about the health of the British economy.

Newly minted one pound coins are seen at the Royal Mint, in Cardiff March 5, 2011. REUTERS/Toby Melville

Data showed UK inflation remained high in March, with annual CPI still at 2.8 percent, its strongest level since May last year.

Analysts said while high price levels would probably not prevent the Bank of England from opting for more monetary easing in coming months, sticky inflation could weigh on growth.

Economists say it remains a close call whether first-quarter gross domestic product numbers next week will show the British economy has slid back into recession.

“Highish inflation is not good for sterling because it means negative real rates for holding sterling-based assets,” said John Hardy, currency strategist at Saxo.

The euro rose 0.7 percent against the pound to 85.81 pence, its highest level since March 20.

Traders said the euro was boosted by central bank demand and by strong gains against the Japanese yen as it recovered from hefty falls on Monday.

Against the dollar, sterling was up 0.1 percent at $1.5302. It edged away from a low of $1.5269 hit on Monday when weak Chinese data lifted safe-haven currencies like the yen and dollar and weighed on currencies perceived to be linked to global growth prospects, including sterling.

But the pound remained well below last week’s peak of $1.5412, which was its highest level since February 20.

Saxo’s Hardy expected it to head lower against the dollar given the weak economic outlook in the UK and the possibility of more Bank monetary easing in the months to come. A break of $1.5250 could see the pound drop towards $1.50, he said.

Traders also expected to see good offers around the $1.54 mark, with the pound likely to struggle to break above $1.5423, the 38.2 percent retracement of its fall from the 2013 peak of $1.6380 hit in January and the March low of $1.4832.

BOE MINUTES

Bank minutes on Wednesday will be closely watched to see whether policymakers are nudging any closer to propping up the economy with more quantitative easing (QE), which is usually seen as negative for the pound.

Market players will also be looking at how policymakers interpret their new remit to disregard above-target inflation after British Chancellor George Osborne tweaked the central bank’s mandate last month.

“It will be interesting to see the MPC (monetary policy committee) interpretation of what that means for future policy and their decision-making,” said Michael Sneyd, FX strategist at BNP Paribas.

Investors will also focus on employment and retail sales figures this week for clues to whether the economy can dodge recession.

A Reuters poll found that while the economy will narrowly skirt recession when the GDP data is released next week, growth is likely to be tepid.

Additional reporting by Nia Williams; Editing by Catherine Evans

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