Sterling hits fresh 5-1/2 month trough on lower CPI data

LONDON: Sterling dived to a fresh 5-1/2-month low versus the dollar on Tuesday after UK consumer price inflation unexpectedly eased, prompting investors to scale back bets on any slim chances of a near-term interest rate rise from the Bank of England.

The pound was already under pressure versus the greenback as concerns the euro zone debt crisis is spreading to Italy prompted investors to buy safe haven currencies.

It last traded down 0.3 percent on the day at $1.5857 , after plunging to $1.5781, its lowest since late January. It tested support around $1.5786, the 38.2 percent retracement of the May 2010 to May 2011 rise.

Traders cited Asian central banks buying sterling around $1.5810, just above the session lows.

"Any expectations of a rate hike have largely diminished. Today's data helped that argument," said Michael Derks, chief strategist at FX Pro.

"That takes a little bit of pressure off the central bank but it would need to be followed by good news that the pace of inflation is moderating further."

Consumer prices fell 0.1 percent last month, the first June decline in the index since 2003, taking the annual inflation rate to 4.2 percent. Analysts had expected the annual rate to hold steady at 4.5 percent.

The UK goods trade deficit also defied forecasts to widen unexpectedly in May to 8.5 billion pounds, casting serious doubt about the scale of net trade's contribution to second-quarter GDP data due later this month.

Economists had forecast a deficit of 7.37 billion pounds and the worsening figure pointed to a continued soft patch in the UK's fragile economic recovery.

As a result, the overall outlook for sterling remains bearish given expectations a dovish Bank of England will hold off with any rise in interest rates until late 2012 and worries about euro zone debt and a global slowdown.

That drives investors to seek safe-haven currencies like the yen, the Swiss franc and the US dollar and weighs on sterling, which is considered to be at the riskier end of the currency spectrum.

Sterling extended losses from the previous session against the Japanese yen, hitting a four-month low at 125.14 yen as well as a record low versus the Swiss franc of 1.3175 francs.

EURO CONTAGION

Analysts said sterling would be pulled around by moves in the euro against the dollar and developments in the euro zone debt crisis.

Euro zone finance ministers on Monday promised cheaper loans, longer maturities and a more flexible rescue fund to help Greece in a bid to stop the crisis sucking in Italy and Spain.

But the promises failed to convince financial markets which looked set for a second turbulent day as Italian, Spanish and peripheral bond yield spreads over German Bunds continued to widen.

The euro was last down 0.2 percent at 87.99 pence, its weakest since mid-June, earlier hitting a trough of 87.49 pence after breaking below its 100-day moving average at 87.87 pence.

The single currency has been unable to maintain gains above 90 pence hit earlier this month as investors shifted their focus from favourable interest rate differentials to the euro zone's debt problems.

"Euro/sterling may see some support around its 200-day moving average at 86.60 pence but I do not see much before that other than the June low around 87.22 pence," said Adrian Schmidt, FX strategist at Lloyds.

Copyright Reuters, 2011