Sterling firms vs euro, but UK current account gap checks gains

By Anirban Nag

LONDON, March 28 (Reuters) - Sterling rose for a fourth straight day on Friday against the euro, which is under pressure from talk that disinflationary pressures in the euro zone could prompt the European Central Bank to ease monetary policy.

But the pound failed to get much traction against the dollar, held in check by a bigger-than-expected current account deficit for Britain in the fourth quarter.

The euro fell to its lowest level since March 6 at 82.47 pence. It was last trading at 82.55 pence, down 0.1 percent on the day and on track for its biggest weekly losses since mid-February.

Against the dollar, sterling slipped to $1.6607, from around $1.6622 after the current account data showed the deficit at 22.4 billion pounds, slightly lower than 22.8 billion in the third quarter, but much higher than forecasts of a 14 billion pound gap.

"The current account numbers were disappointing, driving the pound lower against the dollar," said Philip Hoey, account manager at Caxton FX. "The rally that we saw yesterday after the retail sales data seems to be fading."

The pound rallied broadly on Thursday after British retail sales data beat expectations and bolstered the chance of monetary tightening next year.

A day earlier, Bank of England policymaker Martin Weale said a more robust economic recovery would mean a gradual increase in interest rates next year. He said signs that wage growth was picking up boded well and rates could not stay at record lows forever.

Weale's comments and the retail sales data have helped sterling recover ground lost after data earlier this week showed a steady drop in UK annual inflation, clouding the outlook for rate hikes in Britain.

Some traders said investors were buying pounds on dips on expectations that the economy will outperform its peers, especially the euro zone, in the second quarter, putting upward pressure on gilt yields and making sterling more attractive.

"It appears likely that the UK economy will continue to outperform its peers, to the benefit of the risk asset-related capital flow situation," Manuel Oliveri, currency strategist at Credit Agricole (TLO: ACA.TI - news) said in a note.

Sterling's gains are more pronounced against the euro as attention moves towards Europe, where policymakers are trying their best to tame the euro's recent strength.

Investors sold the euro in early London trade after soft Spanish inflation data. They are likely to step up selling if German inflation data at 1300 GMT shows price pressures are easing further and boosting the risk of disinflation in the broader euro zone.

Euro zone inflation data for March is due on Monday while the ECB is due to meet on Thursday to decide on policy.

The data and meeting assume significance after Bundesbank President and member of the ECB Governing Council Jens Weidmann earlier this week said that it was not "out of the question" for the ECB to buy bank assets to fight deflation - a softening of the German central bank's strict stance on the issue.

Any further easing of ECB policy would be expected to weaken the euro against its major peers. (Editing by Ruth Pitchford)