Prospect of earlier Bank of England rate hikes seen extending sterling rally
* Sterling uptrend intact as upbeat UK data fades QE prospects
* BoE likely to hike rates before ECB, possibly before Fed
* Options suggest investors expect further sterling gains
* Euro/sterling could hit 78 pence in coming year - SocGen
By Anooja Debnath
LONDON, Sept 27 (Reuters) - Bets on further sterling strength are mounting as some in the financial markets consider the possibility that the Bank of England may be the first of the world's major central banks to raise interest rates.
The BoE shows no sign of standing in the way of such bets with policymakers seeming less concerned than in recent months about the impact of a stronger pound.
Upbeat UK economic data has fuelled speculation the BoE might hike rates sooner than suggested by Governor Mark Carney's forward guidance.
By contrast, the European Central Bank is seen more likely to cut rates than raise them. And with the Federal Reserve having shocked markets last week by leaving the pace of its money-printing stimulus unchanged, some analysts say the BoE could even tighten policy before the U.S. central bank.
All this will push sterling even higher, analysts say. While that would have bothered the central bank a few months ago, recent comments from BoE policymakers indicate a more tolerant attitude towards the pound's recent rise.
The biggest contrast in expectations is between BoE policy and that of the European Central Bank, giving the pound even more scope to rise against the euro than versus the dollar.
"There is an increasing risk of the BoE raising rates before the Fed as well as the European Central Bank," said Kit Juckes, FX strategist at Societe Generale, who expects euro/sterling at 78 pence some time over the next year, a level last seen in July 2012.
Sterling has risen around 9 percent to above $1.60 since it hit a three-year low of $1.4814 in early July. It has gained more than 4 percent against the euro since hitting a 4-1/2 month low on Aug. 1.
Some analysts, including those at Morgan Stanley and Citi expect sterling at $1.63 in the near term.
BoE minutes released last Wednesday showed the minority of policymakers who had previously backed the case for more stimulus had changed their stance in September.
In a newspaper interview published on Friday, Carney said he saw no need for more bond-buying as the British economic recovery had "strengthened and broadened".
By contrast, ECB President Mario Draghi said this week the central bank was prepared to offer banks more long-term loans to keep money-market rates from rising to levels that could hurt the economy.
Richard Usher, head of spot trading in EMEA at JPMorgan, said it would be tough for the BoE to ignore the run of strong UK economic data.
"The chance of more QE in the UK is very small now and recent BoE comments reflect that change in sentiment," he said, adding that sterling at $1.60-$1.70 would not particularly worry the BoE.
The BoE said in its most recent minutes that a stronger pound had improved the inflation outlook.
Back in February, with sterling trading between $1.50 and $1.55, some BoE policymakers said the pound would have to weaken further to support a stagnant economy by boosting exports.
With the Fed unexpectedly leaving the pace of its money-printing unchanged last week, JPMorgan's Usher said he was "now even more confident on sterling against the dollar".
However, most analysts expect the Fed will begin to "taper" asset purchases as the U.S. economy continues to improve, possibly by the end of the year. Once this happens, the scope for sterling/dollar gains could wane.
"When the Fed do start to taper then sterling/dollar is going to be a much trickier trade," Usher said.
Nigel Sillis, head of fixed income and currency research at Baring Asset Management, expected sterling to outperform the euro as the currency bloc's debt problems could re-emerge.
However, sterling "seems too expensive against the dollar," he said. "When the dust settles I think we will find the markets will start to want to bid dollars higher because tapering is coming."
Prior to Carney's appointment as governor in July, many market players were expecting he would opt for further monetary easing. That is no longer the consensus.
Option market trends show investors have substantially trimmed bets on sterling falling against the dollar in recent months. One-month risk reversals show the premium demanded to buy sterling "puts", or protection against the currency falling, has almost halved since early July.
Euro/sterling options meanwhile reveal growing expectations the pound will rise against the euro in the coming year.
Until mid-August there was a bias towards buying one-year bets on the euro rising against sterling. This has since switched to a bias towards bets on it falling.
Longer-dated options are more often used by companies for hedging purposes than by speculators.
Chris Turner, head of FX strategy at ING Financial Markets, said the shift in bias "suggests corporate sentiment on euro/sterling has shifted - gentle euro depreciation now seems favoured by the corporate community".
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