BR:Sterling edges up vs dollar, gains seen capped by BoE
LONDON: Sterling inched up against the dollar on Wednesday but looked vulnerable before a Bank of England report on inflation and news conference that may fan speculation of more monetary easing.
The quarterly report, released at 1030 GMT, will outline the bank's growth and inflation projections, although analysts said governor Mervyn King's news conference straight afterwards would likely have a bigger impact on the pound.
Any hints that the BoE may opt for more quantitative easing in future to boost fragile economic growth could hurt sterling. QE involves printing money to buy bonds and tends to weigh on a currency by increasing supply.
Higher-than-expected inflation data on Tuesday prompted some investors to scale back bets on more easing and briefly lifted sterling, but many strategists said the BoE was more concerned with supporting growth than curbing price pressures.
"I think the BoE will continue to respond to weak demand rather than the level of inflation. The risk that they could do more QE by February is very high," Jane Foley, senior currency strategist at Rabobank, said.
"I would be inclined to sell rallies into the inflation report on the basis it will have a dovish tone."
Sterling was last up 0.1 percent at $1.5881, within sight of a two-month low of $1.5857 hit on Tuesday.
Foley said policymakers were likely to keep the option of more easing on the table as the UK economy faced a difficult period ahead.
More austerity is scheduled for 2013 and the growth outlook for the euro zone, the UK's largest trading partner, is worsening.
Ahead of the inflation report, UK unemployment and earnings figures will be released at 0930 GMT. Any decline in the unemployment rate could fan demand for the pound.
The euro edged up 0.1 percent against sterling to 80.12 pence, moving away from the November low of 79.60 pence hit last week. Technical strategists expected strong support for the euro around that level, with the 100-day moving average also coming in at 79.63 pence.
Analysts said aside from the inflation report, moves in sterling, particularly against the euro, would be driven by developments in the euro zone.
"Euro/sterling could come under renewed pressure if euro zone risks resurface again following potential disappointments at the Italian bond auction or euro zone industrial production release due later today," Citi FX strategist Valentin Marinov said in a note.
Uncertainty over when international lenders may agree to release the next tranche of aid for Greece and weak German sentiment data have weighed on the euro this week.
