Sterling steady ahead of PPI data but risks remain

LONDON: Sterling slipped against the dollar ahead of UK producer price data on Friday and looked set to extend losses on the view that the Bank of England is unwilling to embark on a monetary tightening cycle, even if inflationary pressures build further.

Input price inflation, due at 0830 GMT, is forecast to pick up on a year-on-year basis but analysts said the rise was unlikely to be dramatic enough to tempt a dovish Bank of England into raising interest rates any time soon.

Cable was last down nearly 0.1 percent against the dollar at $1.5962, with traders saying a break through resistance around the June 28 low of $1.5912 could see further falls to $1.5770, the 38.2 percent retracement of the May 2010 to May 2011 rise.

"The annual price of inflation is still extremely high and with input PPI which is at such a high level, you have to think the BoE is okay with it," said Kathleen Brooks, research director at Forex.com.

"It has been rising since 2009, but if anything in the last few weeks the Bank of England have stepped back from the idea of interest rate hikes. It means they are either expecting PPI to fall or they are okay with it being quite high.

Sterling has also softened against the euro in recent months as a result of the single currency's favourable interest rate differentials.

On Thursday the European Central Bank hiked base rates to 1.5 percent and markets have priced in another rise this year, while the BoE kept rates on hold at record lows and is not expected to hike before next summer.

The single currency was last trading down 0.3 percent on the day at 89.61 pence , tracking a move lower in euro/dollar as it broke through overnight lows on the news of a draft document outlining EU bank stress tests.

But traders said the market was expecting sterling to dip on the back of the PPI data, citing offers around 90.10 and 90.20 pence, although gains could extend as far as 90.45 to 90.65 before more sellers come in.

Key resistance is seen around 90.83 pence, the 15-month high hit on July 1. Downside suport comes in around 89.44 pence, the 38.2 percent of the June 16 to July 1 rally.

Copyright Reuters, 2011