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

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

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 U.S. 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 October 5, with near term resistance at its October 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.

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

On the FX market, with the frequency of risk events for the GBP currency far higher than its European counterpart this week, the GBP/USD pair could see more volatility. UK data begins with November Inflation figures on Tuesday, where sticky inflation is likely to be characterized by energy bill hikes and food inflation. Wednesday’s minutes from the Bank of England are expected to show the MPC remaining against further purchases by a wide margin, as stimulus in the pipeline and observation of the Funding for Lending Scheme puts members off further QE for the time being. Final UK GDP follows this on Friday, where recent downward revisions to output data are not expected to impact the third reading.

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