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Strong UK data sees sterling rally

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UK data sees Strong pound sterling rally

GBP

Sterling managed to hit a 13-month high versus the dollar Tuesday following stronger-than-expected UK data, which led to increased belief that UK interest rates are set to rise well in advance of US rates.

Comments from Bank of England policymakers that inflation will remain high this year had only a slight impact on the currency, although it did keep speculation of a UK rate hike by mid-year intact.

A surprise jump in UK house prices helped to push the pound to its strongest since 20 January 2010, while a slightly stronger-than-expected reading of UK manufacturing helped keep the pound near key levels at the end of the London session.

The UK purchasing managers' index slipped to 61.5 in February from 62.0 in January, but the reading was higher than forecasts of 61.0. Other data showed UK mortgage approvals picked up at the start of the year. The data helped to maintain strong demand for the pound as signs of an improving economy add to speculation the country has recovered enough to withstand a rise in interest rates.

Markets are largely pricing in a 25 basis point rate rise by June, and analysts said such expectations would continue to push the pound higher. "The BoE is going to hike rates before any of the other G4 central banks," said Raghav Subbarao, currency strategist at Barclays Capital, adding he expected the first rate rise in May. "None of the data today has changed that view," he added.

Shortly after 1500 GMT, the pound was up 0.1 percent on the day. Earlier in the day, traders said the pound was pushed higher by dollar selling by model accounts, which use computer-generated trading recommendations, before paring gains.

The euro remained flat, recovering from an earlier slide as traders said demand for the single currency from European reserve managers helped to bolster it.

USD

The dollar rose against the euro Tuesday on the back of robust US manufacturing data and a cautiously optimistic economic outlook from Federal Reserve Chairman Ben Bernanke.

Markets are still looking ahead to Bernanke's second day of testimony to Congress on Wednesday, and to European Central Bank President Jean-Claude Trichet's appearance on Thursday, after the ECB rate-setting meeting.

"This is a pretty big week for central bank decisions around the major economies," said Aroop Chatterjee, foreign exchange strategist at Barclays Capital.

Stronger-than-expected US manufacturing data helped boost the dollar, as the February reading for the Institute for Supply Management's manufacturing index hit its highest level since May 2004.

Federal Reserve Chairman Ben Bernake told the US Senate Banking Committee that while he saw increasing evidence the US economic recovery has enough momentum to become self-supporting, jobs growth remained far too anaemic.

Bernanke also said that the surge in oil prices is unlikely to hurt the US economy unless it is sustained. Oil prices hit fresh 2-1/2 year highs on Tuesday as supply disruptions and more turmoil in the Middle East and North Africa kept investors on edge. His comments cemented market expectations the ECB will probably hike interest rates before the Fed.

EUR

The euro stayed on the back foot throughout the Asian trading session on Wednesday after yet again failing to break through a key (one month high) resistance level, helping lift the dollar off a 3-1/2 month low against a basket of major currencies.

But further declines for the common currency may be limited a day ahead of a European Central Bank meeting. Given that Eurozone inflation is well above the ECB's target, markets expect the central bank may ramp up its anti-inflation talk. With expectations that the Eurozone's interest rate hikes will outpace the Fed's monetary policy tightening has driven the euro's recent gains against the dollar. However, after the euro neared the top of the current trading range it appeared that investors scaled back their long euro positions as doubts emerged whether Trichet will be as aggressive against inflation as some hope.

Data showed on early Tuesday that the inflation rate in the Eurozone rose to 2.4 percent – a 28-month high. A tightening of monetary policy by the ECB is increasingly looking more likely.

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