Sterling hit its strongest level in more than a week against the euro on Monday, helped by eurozone debt concerns and investors positioning for data on Tuesday that is expected to show elevated UK inflation. Against the dollar, sterling also rose and looked supported near-term, staying above its 100-day moving average at $1.6246 and well above a low of $1.6215 hit on Friday in response to figures showing a sharp contraction in UK industrial output.
Analysts said concerns about a fragile British economy left the pound vulnerable to further falls, however. Technical analysts said a sustained move below the 100-day average would see it target the late May low of $1.6055 and then $1.6000, which coincides with the 200-day moving average. Annual CPI is forecast to be unchanged at 4.5 percent in May. A number above this would boost the pound, but analysts said gains would not be sustained unless investors believe the Bank of England will respond by raising rates. "Even if we get strong inflation data, say 4.7 percent, it's very unlikely the majority of the BoE Monetary Policy Committee are going to start voting for a rate hike," said Jane Foley, senior currency strategist at Rabobank.
Foley said she expected sterling to gain in a knee-jerk reaction to inflation data on Tuesday, before selling off. Sterling was up 0.4 percent versus the dollar at $1.6303, having hit a high of $1.6344 earlier in the session. The euro fell 0.4 percent at 88.13 pence, its weakest since June 2, and dipped as low as 87.98 pence to break below its 55-day moving average around 88.10 pence.