Sterling hit a five-and-a-half month low against the euro on Monday as investors bet that UK interest rates would continue to lag those in the eurozone, while the pound was steady against the dollar. The euro rose to 88.60 pence in early morning trade, its highest since late October 2010, before easing to 88.15 pence, down 0.2 percent on the day.
Technical analysts said the euro's next upside target was the October high around 89.40 pence, while traders said the rally had been capped by UK exporters selling the euro around 88.60/65, helping to keep euro/sterling in its long-term range. Diminished expectations of a Bank of England rate hike in May were likely to keep sterling under pressure after the BoE left rates on hold at 0.5 percent last Thursday.
Against the dollar, the pound was flat at $1.6385, off its 15-month high hit last week at $1.6430 following a faster-than-expected surge in UK producer prices. Traders said it would need to break above the January 2010 high in the $1.6460 area to gather fresh upside momentum.
Analysts said UK consumer price inflation data due out on Tuesday was the market's next key focal point. March inflation is forecast to be steady at 4.4 percent, pausing after a recent run-up but still more than double the BoE's 2 percent target. However, there is the risk that the number may be higher-than-expected in view of last week's surprisingly strong factory gate inflation data.
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