Sterling hits 2-1/2 month high vs dollar, outperforms euro

LONDON: Sterling hit a two-and-a-half month high against the dollar on Monday thanks to demand from Middle Eastern investors that also boosted it against the euro.

Analysts said the British pound could see further gains against a weaker dollar if the so-called US fiscal cliff, a looming combination of tax rises and spending cuts due to kick-in at the beginning of 2013, is not headed off soon.

Sterling hit $1.6202, its highest level since Oct. 5, with near term resistance at its Oct. 5 high of $1.6218. Traders said Gulf investors bought the British pound in early London trade with option expiries at $1.6200 likely to sway trade.

The euro hit a near two-month high against the pound in Asian trade of 81.505 pence, but later eased to 81.29 pence to fall 0.1 per-cent on the day.

Against the Japanese yen, the pound hit its highest level since April 2011 at 136.37 yen. Shinzo Abe's conservative Liberal Democratic Party won elections over the weekend and is expected to ease monetary policy aggressively and weaken the yen.

"We did see sterling/dollar moving higher and most of this gain is due to more easing from the Federal Reserve last week that will have an impact on keeping the dollar depressed and risk appetite elevated," said Jane Foley, senior currency strategist at Rabobank.

Data from the Commodity Futures Trading Commission on Friday showed currency speculators slash bullish bets on the US dollar while they remained long on the pound.

With no UK data to be released on Monday, investors will look to inflation on Tuesday and Bank of England policy meeting minutes a day later for clues on the chances of it authorising more bond-buying. Retail sales for November are also due this week.

"UK CPI should remain above the BoE's 2 percent target, while retail sales should bounce back in November and minutes from the December BoE meeting are likely to reiterate the MPC's "wait and see" approach," Commonwealth Bank of Australia said in a morning note.

"These factors should see UK yields continue to track above their US counterparts and in turn support sterling/dollar."