Sterling helped higher by M&A news, seeking new driver

By Patrick Graham

LONDON, April 22 (Reuters) - Sterling hit its highest against the euro since late February on Tuesday, helped by the latest round of that corporate asset sales that have supported the pound this year.

Britain runs a substantial current account deficit but has been able to fund it with the help of inflows into gilts and other UK-based securities, allowing the pound to move higher over the past year.

Capital (Other OTC: CGHC - news) from Vodafone's sale of its main U.S. business were cited as a major reason sterling gained in the first quarter of 2014. Cash flowing to Glaxo Smithkline from a deal with Swiss drugmaker Novartis (Xetra: NOT.DE - news) are minimal by comparison but underline the benefits Britain may see from a surge in mergers and acquisitions.

"The big picture here is that the pound has been performing very strongly," said Steven Saywell, global head of FX strategy at BNP Paribas (Milan: BNP.MI - news) in London. "It is one of our top trades going forward, although we would tend to veer away from it against the dollar in favour of trading it against the euro and other crosses."

The pound rose 0.2 percent against the euro to 82.09 pence. At $1.6826, it was also higher than it had been at the close of U.S. trading before the long Easter weekend.

It repeatedly fell back from this year's highs around $1.3840, however. Dealers said that underlined how rhetoric from policymakers has made it unlikely the euro, and hence the pound, will gain against the dollar.

"M&A is one of the supporters of the pound today, although the market in general is quite listless and cable (the pound against the dollar) does seem to be running out of steam," said Graham Davidson, a trader with NAB in London.

After a 10 percent surge over 12 months on a trade-weighted basis, the pound had stalled in the past six weeks as doubts over the structure of improving economic growth crept in.

Some analysts said more signs of improvement will be difficult to come by in this week's March retail sales numbers, which will struggle to match highs from the turn of the year.

"Despite much better weather with the later Easter this year, it is reported that high street footfall fell by over 10 percent on Easter Sunday compared to last year," South African bank Investec (LSE: INVP.L - news) wrote in a note to clients.

"The pound is likely to remain range-bound in the current environment but will be sensitive to breaks above 1.6870 and 1.2240 against the dollar and euro respectively, to potentially trigger the next leg of the pound rally."

Expectations that an improving economy will prompt the Bank of England to raise interest rates in the first half of next year have been at the centre of the pound's gains. BoE (Shenzhen: 000725.SZ - news) minutes on Wednesday will also provide the latest food for thought on whether the bank is really likely to deliver before general elections next May. (Editing by Larry King)