LONDON, Jan 20 - Sterling charged higher on the dollar on Tuesday, gaining one percent on the day, and dug in its heels on the resurgent euro after UK inflation data kept the fire going under expectations for a February interest rate rise. Eurozone-harmonised inflation kept a steady pace of growth at 1.3 percent in December, beating forecasts for a small fall. Analysts had said a bigger fall could have cooled tightening expectations and hurt the pound. Many in the market expect the BoE to hike the cost of borrowing at its February policy meeting but some analysts say inflation could be the one factor that persuades Britain's central bankers to postpone tightening. Sterling's rise versus the dollar was also driven by renewed selling of the U.S. currency, which took it down sharply versus the euro in early European trade.
"It (inflation data) slightly increases the likelihood the Bank of England will raise rates in February, but the inflation number is still a long way below target," said Jane Foley, currency strategist at Barclays Capital in London. "Cable (sterling/dollar) is largely chasing euro/dollar." At 1110 GMT sterling traded at $1.7985 after rising as high as $1.8023 in the aftermath of the inflation data release. It was still below 11-year peaks set at $1.8577 last week but up from a two-week low set on Monday. Against the euro, sterling was slightly up on the day at 69.21 pence , recouping losses made earlier in the session on the back of the euro's rise. Prospects of higher interest rates have supported sterling through December and early January, before some profit-taking took over. BoE governor Mervyn King is scheduled to speak to a business group at Aston Villa football club at 1345 GMT. Meanwhile, criticism piled up on Britain's Chancellor of the Exchequer Gordon Brown for his public spending programme, with the Organisation for Economic Cooperation and Development (OECD) saying belt-loosening was not necessarily justified. The OECD also said the UK needed early and gradual monetary tightening to reduce instability from the housing market.
POLITICAL ISSUES REVIVED
Markets were also looking towards next week when UK Prime Minister Tony Blair will be facing possibly the toughest time of his term. A debate on controversial legislation and a key report on last year's suicide of a government expert are both due then. Blair may suffer the first major parliamentary defeat since he became prime minister in 1997, over controversial plans to make students pay more for higher education. The day after, next Wednesday, senior judge Lord Hutton will deliver his long-awaited report on the suicide of weapons expert David Kelly, which could rock the government to its core. Blair's political weakness undermined sterling last year, but the prime minister said late on Monday that he expected to come out safe. "I believe I will survive it, yes," Blair told BBC's Newsnight, at the end of a programme in which he faced vociferous criticism of his education plans.//