Sterling pauses after rough week vs dollar

By Patrick Graham

LONDON, March 21 (Reuters) - Sterling traded marginally lower on Friday, still suffering from the shock to the system of Wednesday's U.S. Federal Reserve meeting, which has engineered a change in some investors' attitude to the dollar.

The pound, already struggling to extend a bullish eight-month run, has fallen more than 1 percent against the dollar this week, most of it following Fed chair Janet Yellen's hint that U.S. interest rates could rise early next year.

It is broadly flat against the euro over the past seven days, however, and analysts look divided over whether this week's action is really enough to break the pound out of a broader range it has held since mid-February.

"Cable could be vulnerable in the near term," Citibank currency strategist Valentin Marinov said.

"The less dovish Yellen-led Fed should continue to be supportive for the dollar across the board. The market still seems to be short on the dollar against the majors. The dollar could regain more ground as markets square those shorts."

Sterling had fallen 0.2 percent against the dollar in early European trade but it recovered some ground ahead of UK public sector borrowing data which showed the government's efforts to curb the deficit progressing.

There was little move in sterling after that data. Against the euro it was just 0.1 percent lower at 83.55 pence.

Technical analysts at Swedish bank SEB (Paris: FR0000121709 - news) said sterling looked ripe for at least a pause in losses against the dollar.

"We've now basically fallen down to the channel floor and even if a downside exit is increasingly likely there should at least be a minor correction bounce before making a real attempt lower," they said in a morning research note.

"We see a possible bounce to 1.6560/70. Falling below 1.6494 and the downside test is already in the making."

The pound traded at $1.6501 by 1000 GMT.

The main element still in sterling's favour is Britain's improving economy, which looks set to lead the Bank of England to raise interest rates for the first time well before counterparts in the euro zone.

It had also been expected to beat the Fed in raising rates, but Yellen's comments have thrown that into question. (Editing by Catherine Evans)