LONDON: Sterling retreated from an eight-month peak against the dollar on Tuesday, and could drop further if data later in the day showed UK price pressures abating.
The annual consumer price inflation rate, due at 0830 GMT, is forecast at 2.7 percent for August, down from 2.8 percent a month earlier.
A large-than-expected drop in annual price increases could see short-term market interest rates fall and push sterling lower. On the other hand, stubborn price pressures would keep sterling at recent highs, traders said.
Recent strong UK data, rising consumer confidence, and an improvement in the labour market have led markets to price in a rise in interest rates much earlier than flagged by the Bank of England, possibly as soon as late 2014.
The BoE has said it does not plan to raise interest rates before UK unemployment falls to 7 percent, something it does not see happening until late 2016.
Sterling traded at $1.5925, down from Monday's eight-month high of $1.5963 with offers cited at $1.5950. The euro was flat at 83.885 pence.
"Indications that the CPI inflation dropped more than expected in August would lend support to the BoE's view that price pressures will abate before long," said Valentin Marinov, currency strategist at Citi.
"This could make some market participants less eager to price in an earlier removal of policy accommodation than the BoE signalled last month."
He added that given the close relationship between UK market rates and sterling, such an outcome could lead to some profit taking in the currency.
Some traders said sterling was supported by the British government raising 3.2 billion pounds ($5.1 billion) from the sale of a 6 percent stake in Lloyds Banking Group. The inflows are likely to bolster the government's finances.
Comments
Comments are closed for this article.