Sterling rises vs dollar, but gains seen limited

LONDON: Sterling strengthened against the dollar on Tuesday, tracking gains in the euro after better-than-expected German manufacturing data though its rise was expected to be limited due to concerns about the UK's faltering economic recovery.

The pound was also lifted in tandem with perceived riskier currencies like the Australian dollar after better-than-expected China factory sector data marginally eased global growth worries and helped buoy equities.

Sterling was up 0.4 percent against the dollar at $1.6534, comfortably above support at its 100-day moving average around $1.6294. Further gains could see it re-test its recent 3-1/2 month high of $1.6618.

The UK currency has benefited recently as investors seek alternative currencies at a time of heightened concern about euro zone debt problems and weakening growth in the United States, while the risk of official intervention deters them from buying Swiss francs and yen.

"The fact that other currencies look uglier will give sterling a bit of a boost until the market gets some weaker UK data," said James Hughes, senior markets analyst at FX broker Alpari.

However, the pound reacted little to a Confederation of British Industry survey showing a surprise improvement in British factory orders in August, with investors remaining concerned about the fragility of the UK recovery.

CBI head of fiscal policy Richard Woolhouse warned the risks to manufacturing activity and business confidence had increased due to "market volatility and the recalibration of growth expectations world wide".

UK DATA

Alpari's Hughes said sterling was unlikely to benefit much from better UK data as it would do little to budge expectations that UK interest rates will stay low for a prolonged period.

Weak data was more likely to have an impact and push the pound lower, however, due to concerns about the possibility that the Bank of England will opt for more quantitative easing, he said.

UK data later this week include a CBI survey on retail sales on Thursday and the second estimate of second quarter GDP due on Friday, which is expected to confirm the economy grew by a lacklustre 0.2 percent during the three months to June.

Major currencies were expected to stay rangebound this week, however, ahead of a speech on Friday by US Federal Reserve Chairman Ben Bernanke at Jackson Hole to see if he hints at further steps to revive a struggling economy.

The euro was up 0.45 percent against the pound at 87.63 pence , staying above the early August low of 86.44 pence. The euro was helped as better-than-expected German manufacturing data outweighed a dismal reading of investor sentiment.

Late last week, the euro dropped briefly below its 200-day moving average -- now at 86.73 pence -- but it has since recovered. Technical analysts say a close below that level could signal further falls.

"A close below the 200-day moving average has the potential to retarget the May lows at 86.10 and ultimately the trend line support at 85.45 from the 2010 lows at 80.65," CMC analyst Michael Hewson said in a note to clients.

Copyright Reuters, 2011