Sterling rises after UK industrial output data beats forecasts

LONDON: Sterling rose on Tuesday after Britain's industrial output beat forecasts, adding impetus to the view that the economy was firmly on the path of a recovery.

But market participants refrained from pushing the pound much higher before Wednesday's Bank of England Inflation Report, in which the central bank could provide forward guidance and indicate that interest rates will stay at record lows for a prolonged period.

Sterling was up 0.1 percent at $1.5366, having hit a session high of $1.5392. The euro was down 0.1 percent at 86.29 pence, off a low of 86.185 pence.

Britain's industrial output in June rose much faster than forecast and hit its quickest pace in over two years, driven by manufacturing.

The numbers followed data on Tuesday showing British retail sales had their best July performance since 2006, while UK house prices rose at their fastest since 2010.

"UK data has been good but sterling is still below that $1.5380 level, which is significant," said Kathleen Brooks, research director at FOREX.com. "There is a bullish bias but people are unwilling to go very long sterling ahead of tomorrow's BoE Inflation Report."

Short-term interest rates are being anchored by expectations that the central bank may signal it will keep its key policy rate low at least until late 2015/2016.

Money market rates, such as overnight indexed swaps , are pricing in the possibility of the first move in the bank rate, currently at 0.5 percent, in three years. A 25 basis point rate hike is fully factored in only in four years.

"Our favoured statement in the Inflation Report would be that no rate hikes until the unemployment level has fallen below 6.5 percent unless wage growth exceeds 4.5 percent," said Saeed Amen, currency strategist at Nomura. "If they put explicit thresholds around forward guidance or some sort of message similar to that sterling would fall."

But with the recent spate of positive data, some analysts said there was an outside chance the central bank could sound less dovish than expected and this could see sterling rebound.

Britain's FTSE 100 stocks index erased losses after the data and was last up 0.09 percent.