Sterling inches higher, eyes on euro zone outlook

By Patrick Graham

LONDON, Feb 24 (Reuters) - Sterling inched higher on Monday at the start of a week which is likely to see players focused on the divergence in fortunes of the UK economy and its neighbours in the euro zone.

The pound has hit stickier territory in the last couple of sessions after gaining against the euro and dollar on bullish signs about British growth and, traders say, sales of dollars stemming from Vodafone's sale of its main U.S. business.

But a flash estimate of euro zone inflation for March at the end of this week could nudge the European Central Bank in Frankfurt into a move to ease policy further at a time when the Bank of England is considering when best to do the opposite.

That adds up to higher returns on sterling assets.

"The overall picture is that sterling should hold up reasonably well," said Ian Stannard, a strategist with Morgan Stanley (Shenzhen: 002588.SZ - news) in London.

Weaker UK retail sales numbers on Friday did not derail expectations that the BoE (Shenzhen: 000725.SZ - news) would be the first major central bank to raise rates after five years of ultra-loose policy.

"Data wise we're still seeing reasonably robust numbers. They may not be showing that same upwards momentum that we have seen in past months but are levelling off at higher levels," said Stannard.

In the short-term traders said the pound looked stuck between $1.6610, at which some say orders in the Vodafone deal look to be set, and $1.6690. It was up 0.4 percent and in the higher end of that range in morning trade, while also 0.2 percent higher against the euro at 82.50 pence.

Analysts' main remaining concern about the British recovery is that it may be based too much on another bubble of consumer credit and rising house prices in some cities rather than on productivity gains and business investment.

But either way the headline numbers dwarf those in a euro zone where price changes are only just holding in positive territory. The market took an above-forecast Ifo survey from Germany in its stride on Monday.

"Any more substantial move will probably be initiated from outside the UK," analysts from KBC said in a morning note.

"In this respect, sterling traders will keep a close eye on ECB comments and on the euro zone February CPI, scheduled for release on Friday. We maintain a sell-on-upticks approach for the euro."