Sterling rises on robust data; talked up by MPC Sentance - Reuters UK

Thu Feb 17, 2011 3:50pm GMT

* Sterling rises 0.5 percent on day to $1.6170 GBP=D4

* UK CBI factory orders improve in February

* MPC's Sentance says rising pound may help offset inflation

By Neal Armstrong

LONDON, Feb 17 (Reuters) - Sterling rose on Thursday, shaking off the previous day's losses, helped by robust economic data and comments from the Bank of England's Andrew Sentance, who made reference to a rising pound offsetting inflation.

British factory orders improved more than expected in February and firms expected to put up prices at their fastest pace in 2-1/2 years, the CBI's monthly industrial trends survey showed on Thursday.

The Confederation of British Industry survey's total order book balance rose to -8 this month from -16 in January, well above expectations of a reading of -14. [ID:nAHLHDE7DD]

"Today's price action has been driven by the market looking at the CBI data and thinking the real economy is doing relatively well, which could mean more MPC members moving into the hawkish camp," said Ray Farris, currency strategist at Credit Suisse.

Sterling GBP=D4 traded with gains of around 0.5 percent versus the dollar at $1.6170. It was probing near-term resistance at Wednesday's high of $1.6185.

The pound had fallen back around two U.S. cents from that high on Wednesday as the Bank of England's inflation report downgraded the 2011 growth forecast and Governor Mervyn King took a less hawkish tone than the market had been anticipating.

Sentance has been calling for a rate hike since June 2010 and said the central bank's latest economic forecasts underestimate upside risks to inflation, and interest rates need to rise faster than markets expect to bring it back to target. [ID:nLAC005807].

Implied rates, based on interest rate futures and swaps BOEWATCH, are pricing in a quarter percentage point rate hike in June and another one in October.

One of the advantages of raising interest rates now would be a rise in the value of the pound, Sentance said. This would help offset the rising cost of imported commodities, which have helped drive inflation to double the BoE's two percent target.

"We think the BoE will hike rates in May and if that's the case, sterling will appreciate. I'm still bullish on sterling, particularly against the euro," said Farris at Credit Suisse.

The euro traded down around 0.3 percent against the pound at 84.10 pence EURGBP=D4, not far from a four-week low hit earlier in the week of 83.56.

Gilt yields tracked sterling lower on Wednesday as the market adjusted to the possibility that UK rates may not need to rise as quickly as previously thought, but relative to other countries, the rate outlook was still favourable.