Sterling slipped on Tuesday but kept close to its recent highs after UK inflation eased less than expected in February, lowering the chances of further monetary easing in coming months. The pound has been underpinned by a run of better data, pushing it to a 13-month peak against a trade-weighted basket of currencies on Monday.
Analysts expect it to resume its uptrend if there are more signs of economic improvement, and some expect it to benefit from the UK budget on Wednesday. "Sterling could outperform if there is a feeling that the UK budget is pro-business and pro-growth," said Audrey Childe-Freeman, global head of currency strategy at J.P. Morgan Private Bank. She expects the pound to gain further in the second half of the year as the economy improves.
Finance minister George Osborne will present his 2012/13 budget on Wednesday at a time when the economy is showing signs of starting to recover. The independent Office for Budgetary Responsibility is expected to raise its growth forecasts which will be released alongside the budget. Inflation is slowing, though not at the pace the central bank had expected.
Against a broadly higher dollar, sterling was down 0.2 percent at $1.5854, outperforming currencies like the Australian and New Zealand dollars which fell more than 1 percent. The UK currency has gained for the past three sessions and hit a two-week high on Monday.
Analysts said a further rise could be in store if sterling closes above its 200-day average, a key chart level, currently around $1.5859. The near-term target for the pound is this week's high of $1.5915, then the February 29 high of $1.5993, traders said. The euro rose 0.2 pence to 83.425 pence, recovering from a session low of 83.16 pence struck after the UK inflation data. The common currency fell to a one-month low of 82.83 pence on Monday.
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