Sterling falls vs dollar; vulnerable before CPI data

• Sterling falls vs dollar, but holds above 7-1/2 mth low
• UK CPI data in focus at 0830 GMT
• Weak number would add to worries about more QE
• Pound falls in tandem with the euro

LONDON, Sept 12 (Reuters) - Sterling fell against the dollar on Tuesday, under pressure ahead of UK inflation data that could, if weak, add weight to speculation about the possibility of more monetary easing by the Bank of England.

The pound also fell along with the euro on a report China may not agree to buy Italian bonds -- talk of which had boosted sentiment earlier --, with the market remaining worried about the prospect of contagion from the euro zone debt crisis.

Sterling was down 0.3 percent at $1.5810 , though it stayed above a 7-1/2 month low of $1.5774 hit on Monday.

Analysts said the pound could extend falls if annual CPI inflation for August -- due at 0830 GMT -- comes in below the previous month's 4.4 percent rate, although the median forecast of analysts is for a slight rise to 4.5 percent.
"Sterling is likely to see sideways trading unless we get a sub-4.3 percent CPI reading," said Gavin Friend, currency strategist at nabCapital.

He added that a weaker number would have more impact than a stronger number, given that the BoE has already communicated a belief that the current high levels of inflation are only temporary.

Analysts at ING, however, warned inflation could be firmer than expected, citing risks that the consensus forecast may be underestimating the lagged effects of food price increases.

This would dampen expectations for more quantitative easing from the BoE any time soon and would mean the euro "should struggle to get back above the 86.50 pence area on a sustained basis", they said.

A broadly weak euro traded down 0.1 percent at 86.10 pence , though it stayed comfortably above a 6-month low of 85.31 pence hit on Monday.
The euro has fallen sharply from levels above 88 pence last week as the single currency succumbed to hefty selling pressure due to mounting worries over a potential Greek default, rising Italian bond yields and concerns over French banks.

Technical charts suggested the single currency was likely to run into resistance around 86.60, the 38.2 percent retracement of the Aug. 31 - Sep. 12 slide.
However, any gains for the pound were expected to be limited due to concerns about a weak UK economy and the possibility of more QE.

A survey from the Royal Institution of Chartered Surveyors on Tuesday gave more downbeat news on the UK, showing house prices in England and Wales fell in August and transactions slipped to levels last seen during the recession in 2009.

 

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