Sterling struggles as UK inflation falls back to zero

By Jemima Kelly

LONDON, Sept 15 (Reuters) - Sterling fell against the dollar on Tuesday after data showed UK inflation fell back to zero in August, while investors eyed a U.S (Other OTC: UBGXF - news) . Federal Reserve meeting that could see interest rates hiked for the first time in almost a decade.

Bank of England policymakers reckon inflation is to remain near zero for the next few months after dipping into negative territory for the first time in half a century earlier this year, keeping pressure off them to raise UK rates any time soon.

But in the United States, a rate rise is looking more imminent. The Fed begins a two-day policy meeting on Wednesday, and while most in the market reckon the central bank will keep rates at their record lows until at least December, some are betting this meeting could see a lift-off in rates.

"If you believe the market consensus, that there's a less than even chance of the Fed moving, maybe positioning would suggest otherwise, so you don't want to be overly defensive on the Fed heading into Thursday," said UBS (NYSEArca: FBGX - news) currency strategist Geoffrey Yu.

Sterling fell half a percent to $1.5350 in afternoon trade in Europe, having earlier traded over a cent higher. Against a broadly weaker euro, the pound was flat at 73.40 pence.

A fall in petrol prices and a smaller seasonal increase in clothing prices than in 2014 were the main drivers for the slight slowdown in UK price growth from 0.1 percent in July, the Office for National Statistics said.

But most strategists said the markets were being driven more by Fed expecations and positioning ahead of Thursday's statement.

"Anything that happens this week prior to the Fed has less importance than it normally would," said Barclays (LSE: BARC.L - news) currency strategist Hamish Pepper. "There seems to be a real reluctance for anyone to put too much risk on across G10 currencies ... and sterling's no exception."

Rock-bottom inflation is the central argument against a move higher in UK rates, on which markets have blown hot and cold for the past two years. But countering that, jobs and wages numbers have been more positive.

Analysts from BNP Paribas (Xetra: 887771 - news) said they were focused on Wednesday's employment report, which would be more important for sterling than the inflation numbers. (Editing by Ralph Boulton)