Sterling edges up versus dollar but still seen vulnerable

Fri Feb 22, 2013 4:14am EST

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* Sterling edges away from 2-1/2 year low versus dollar

* Analysts say sterling still vulnerable to easing prospects

* Weak UK economy, risk of ratings downgrade also weigh

* Could consolidate in very short term

LONDON, Feb 22 (Reuters) - Sterling pulled away from a two-and-a-half year low against the dollar on Friday as it rebounded after recent sharp falls, although the prospect of more monetary easing left it vulnerable.

Bank of England minutes on Wednesday showing policymakers edging closer towards more quantitative easing, and the bank's report last week showing inflation would stay high and growth weak have combined to spark steep falls in the pound.

Analysts and traders said the risk of a downgrade to the UK's triple-A sovereign rating was also weighing on the currency and leaving longer-term investors increasingly inclined to sell. However, it could rebound in the short term as market players book profits on its recent drop.

The pound was last up 0.1 percent at $1.5277, recovering after falling as low as $1.5130 on Thursday, its weakest since mid-July 2010. Gains were expected to be limited, however, with traders reporting offers from $1.5320-50.

Traders said investors were likely to take advantage of higher levels to resume selling, with many expecting the pound will soon drop to $1.50.

"When the UK has a central bank that has turned its back on an inflation target and at the same time there is the potential for it to do more quantitative easing, long-term investors are questioning whether this is a good place to hold their money," said Simon Smith, economist at FXPro.

"In the very short term, sterling could see a bit of a correction but thereafter it will push towards $1.50 and could be around the $1.45 area by mid-year."

Data on Thursday showing Britain's public finances posted a large surplus in January and a survey revealing an improvement in factory orders helped the currency to rebound.

The euro edged up 0.1 percent to 86.56 pence, though it remained well below a near 16-month high of 87.645 pence on Wednesday.

But the euro risked coming under selling pressure due to uncertainty about the outcome of elections in Italy this weekend.

"The latest FX price action seems to have led some investors to revise lower their outlook for sterling. We also think that sterling could remain under pressure across the board in coming months," analysts at Citi said in a note to clients.

"That said, given the brutal moves of late, some consolidation could be on the cards in the very near term," they said, adding that it could dip to $1.50 or lower in the event of a sovereign ratings downgrade in coming weeks.

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