Sterling stuck, eyes on euro zone and Vodafone flows

By Patrick Graham

LONDON, Feb 24 (Reuters) - Sterling was stuck fast in the middle of a recent trading range on Monday, with players looking to euro zone data later this week or the completion of inflows from a major merger deal for clearer direction.

The pound has hit stickier territory after gaining strongly against the euro and dollar thanks to a bullish run of UK economic data and, traders say, sales of dollars stemming from Vodafone's sale of its main U.S. business.

Some traders say the Vodafone deal may shackle the pound between $1.6610, at which they say some orders in the deal look to be set, and $1.6690. Analysts at Societe Generale (Paris: FR0000130809 - news) told clients on Monday that the next 10 days would see the bulk of the flow and offer options for selling sterling.

"The difficulty of hedging the currency aspect of the share proceeds mean that a significant amount of sterling will be purchased in the FX market between February 24 and March 4," said SG strategist Alvin Tan.

"I wouldn't be surprised if the bulk of it was done by this Friday. After that there should only be bits and bobs after this week from shareholders who may be late (in completing their transactions)."

Sterling gained 0.2 percent to trade in the middle of that range late on Monday, and was also 0.1 percent higher against the euro at 82.57 pence.

With few frontline domestic economic numbers to go on this week, February euro zone inflation on Friday is seen as having the potential to nudge the European Central Bank into easing policy.

At a time when the Bank of England is considering when best to do the opposite, that would signal relatively higher returns on sterling assets and underpin the pound, although the final number for January on Monday was revised up.

"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.

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

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."