Sterling hits 13-mth high vs dollar on UK rate view

LONDON: Sterling rallied to a 13-month high against the dollar on Tuesday after stronger-than-expected UK economic data fuelled speculation that UK interest rates will rise well before those in the United States.

Comments from Bank of England policymakers that inflation rill remain high this year bolstered the pound as they kept intact speculation about a UK rate hike by mid-year.

A surprising jump in UK house prices helped to push the pound to $1.6330 in early London trade, its strongest since January 2010, while a slightly stronger-than-expected reading of UK manufacturing helped keep the pound near the key $1.63 level.

The UK purchasing managers's index slipped to 61.5 in February from 62.0 in January, although the reading was higher than forecasts of 61.0. Other data showed UK mortgage approvals picked up at the start of the year.

The data helped to keep demand strong for the pound as signs of an improving economy add to speculation the country has recovered enough to withstand a rise in interest rates.

Analysts said the data was positive for sterling as it showed buoyancy in the manufacturing sector would help the UK economy even as drastic cuts to government spending are seen shaking the recovery. "We've had some decent numbers in the UK. Anything over a 60 reading (in the PMI) will be reassuring for people who need the export sector to offset some of the fiscal austerity," said Paul Robson, strategist at RBS.

By 1158 GMT, the pound traded at $1.6275, up 0.1 percent on the day. Earlier in the day, traders said the pound had been pushed higher by dollar selling related to model accounts, which use computer-generated trading recommendations, before paring gains.

The euro was little changed at 84.93 pence, recovering from an earlier slide as traders said demand for the single currency from European reserve managers helped to bolster it.

This pulled sterling away from its peak versus the dollar, they added.

Others in the market said the pound's rally had stopped short of stop-loss orders suspected above $1.6330, while technical analysts said the pound may encounter resistance at $1.6379, the 76.4 percent retracement from its 2009-2010 fall.

In testimony to a government committee, BoE Governor Mervyn King reiterated his view that inflation would remain above the central bank's 2.0 percent target this year.

Deputy Governor Charles Bean said he had become more concerned that elevated inflation may last longer than first thought.

Analysts said comments from BoE policymakers were having limited initial impact on sterling as they did little to add to the central bank's position that it will not rush into raising rates even as inflation pressures continue to build.

"What King has said thus far is consistent with the BoE's inflation report and the MPC minutes (released last month) which essentially has set up the case that the BoE will be patient in hiking rates," said Michael Derks, currency strategist at FXPro.

Analysts say investors would be quick to jump on any clear indications of change in the delicate balance of the central bank's rate-setting committee.

The BoE voted 6-3 last month to hold rates at a record low 0.5 percent with the camp supporting a rise gaining one more vote from the previous meeting.