Sterling stays within sight of 2014 highs after early dip vs dollar

By Patrick Graham

LONDON, April 10 (Reuters) - Sterling inched down versus the dollar on Thursday but stayed within sight of 2014 peaks after hitting its highest in almost two months, helped by a slide in the U.S. currency this week that has surprised many in global markets.

A number of major banks had turned against the pound towards the end of last week, convinced that more robust data and the first signs from the U.S. Federal Reserve of higher interest rates next year were set to push up the dollar.

In the event, even after the European Central Bank pointed towards the possibility of money-printing, the mood has turned again and the weakness of the dollar since jobs figures last week has taken sterling back to around $1.68.

After hitting a high of $1.6821 in Asian trading, it edged down to $1.6770 in European hours.

"There's a little bit more upside potential there against the dollar, although I wouldn't be calling it as high as $1.70," said Ian Stannard, strategist with Morgan Stanley (Berlin: DWD.BE - news) in London.

"The UK's growth picture is still holding up in the near term. Exports are still a bit volatile, but output and the overall outlook is pretty solid."

Doubts have crept in over the past few weeks about the structure of Britain's economic upturn, but the International Monetary Fund sharply upgraded its forecasts for growth on Tuesday, as did a leading domestic think-tank.

The IMF now says it expects the economy to expand 2.9 percent in 2014 before easing to 2.5 percent next year. That was up from previous forecasts of 2.4 and 2.2 percent, respectively. Industrial output data earlier this week was also stronger than forecast, raising hopes the recovery is broadening out somewhat.

"The picture against the dollar for sterling may be slightly more complicated, but there is a lot of value to be had on some of the crosses," said Stannard, pointing to the pound against the Swedish crown as one play.

The pound and the euro gained more than half a percent against the crown on Thursday after Sweden's consumer price index fell deep into negative territory, down 0.6 percent year-on-year in March.

Analysts from French bank BNP Paribas (Milan: BNP.MI - news) closed out their own buy recommendation for the pound against the crown after that move, having gained 3.7 percent since mid-March.

BARRIERS

Dealers and analysts pointed to resistance on the trade-weighted sterling index, around 86.40, a level it bounced off twice in March. The pound also looks overbought on the Relative Strength Index, which compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions.

"This week's data has proved interesting and supportive for sterling, but it has chiefly been a dollar story," said Paul Robson, one of the strategists who had called for the pound to weaken at the end of last week.

"For us sterling is still a multi-month sell but it has become clear that we will need a catalyst, and that probably has to come from the U.S. side."

U.S. Federal Reserve policymakers have managed to soften the message taken by markets from Fed chief Janet Yellen's first news conference in charge last month, where she spoke of a first rate hike as possible early next year.

Whether expectations on U.S. rates break out higher from here will depend on the coming month's hard economic data, with jobless claims on Thursday the lowest in almost seven years. The pound dipped in response before recovering swiftly. (Editing by Hugh Lawson)