Sterling slips as dollar edges higher, with all eyes on U.S

By Harry Robertson

LONDON (Reuters) - The British pound fell on Tuesday as the dollar rose, with investors focused on U.S. inflation figures and the midterm elections.

U.S. consumer price index (CPI) inflation data for October is due out on Thursday. Global investors will scrutinise it for its implications for Federal Reserve interest rate policy.

Before that, Americans go to the polls on Tuesday in an election that could see the Republicans take control of both the House and Senate. The final results may not be clear for days, however.

Sterling was down 0.23% against the dollar to $1.1489 in the morning session in Europe, having earlier fallen more than 0.5%. It slumped to a record low of $1.0327 in September after the government's disastrous tax-cutting budget, but has since rebounded strongly.

The fall came as the dollar index rose 0.1% to 110.28. The index fell sharply in the previous two sessions, after Friday's mixed jobs data boosted hopes that the Fed could slow down on its aggressive interest rate hikes.

Uncertainty about whether the dollar's huge rally has peaked is the key issue at the moment, said Kamal Sharma, senior currency strategist at Bank of America. Sharma said he thought the dollar had further to rise, meaning the pound should fall.

"We're looking at $1.07 (for the pound) by the end of the year," he said. "That's in line with our still constructive views towards the dollar."

Yet he added: "With U.S. CPI (on Thursday) and midterms today, I don't think the market is really going to look beyond that."

The euro was up very slightly against the pound at 87.04 pence on Tuesday.

Analysts said the British government's fiscal statement, due next week, could trigger volatility in sterling and other British assets. The new finance minister, Jeremy Hunt, is expected to raise taxes and slash spending as he tries to regain credibility among investors after September and October's market chaos.

Bank of England Chief Economist Huw Pill on Tuesday warned of a difficult path ahead for the British economy.

"I think we cannot declare victory against second-round (inflation) effects, but we are entering a recession," he said at a conference organised by UBS.

Analysts at Dutch bank ING said they thought any rallies for the pound above $1.15 were not sustainable, given the economy's challenging outlook.

(Reporting by Harry Robertson; Editing by Robert Birsel)