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Sterling set for biggest daily gain since 2017 after U.S. CPI

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester

By Joice Alves

LONDON (Reuters) - Sterling was set for its biggest daily gain since January 2017 against a weakening U.S. dollar on Thursday after U.S. consumer prices rose less than expected, opening the way for the Federal Reserve to slow the pace of its interest rate hikes.

After falling 1.6% on Wednesday, the pound leapt 2.86% to a session high of $1.1685, hitting its highest since Sept. 13.

"The CPI report has reinforced the sell-off momentum in the dollar," said Lee Hardman, currency strategist at MUFG in London.

"It gives the market more confidence that there could be a turn in the inflation cycle and the Fed could slow the rate hike pace in December."

(Graphic: Cable Nov. 10 - https://fingfx.thomsonreuters.com/gfx/mkt/znpnbdwyxpl/Cable%20Nov%2010.png)

Against the euro, sterling jumped 1.2% to 87.15 pence, reversing a 1% fall on Wednesday and setting the UK currency on track for its biggest daily gain against the single currency in one month.

After recent losses, sterling had more room against the dollar to rise than the euro, which also gained 1.6% on the day against the dollar to trade at $1.0170.

"Sterling may have become a little oversold yesterday," Jeremy Stretch, head of G10 FX strategy at CIBC, said.

"However, we would prefer to remain a seller of sterling rallies," he added, mentioning expectations for weak UK GDP figures on Friday and data showing UK house prices fell in October amid rising mortgage rates.

The outlook for the UK economy is gloomy, with the Bank of England (BoE) warning last week of the risk of a two-year recession.

Investors are now waiting for Prime Minister Rishi Sunak and his finance minister Jeremy Hunt to announce their first budget programme on Nov. 17. The new government is likely preparing to announce major tax increases and spending cuts.

Sterling fell to a record low against the dollar in the wake of the previous prime minister's mini-budget in September and the BoE had to step in and buy government bonds to halt a firesale of assets by British pension funds.

(Reporting by Joice Alves; Editing by Mark Potter)