Sterling edges higher as oil bounce whets risk appetite

[LONDON] Sterling edged up from a two-week low against the dollar on Wednesday, as a bounce in oil prices whetted investors' appetite for riskier currencies after mixed data from Britain's labour market.

The pound had fallen to US$1.4235 in afternoon trading in Europe, its weakest since Feb 1, after strong US industrial data pushed the dollar higher across the board.

But with oil prices rising more than 5 per cent to above US$34 a barrel after Iran voiced its support for a plan to freeze production, sterling edged back up. By 1700 GMT, it was trading up 0.1 per cent on the day at US$1.4310. Against the euro, the pound was up 0.2 per cent at 77.815 pence.

Sterling tends to rise along with risk appetite - contrary to the euro - on account of its higher interest rate and Britain's large current account deficit.

"Risk is definitely a factor today - it's rather driven by the oil price," said Commerzbank currency strategist Esther Reichelt, in Frankfurt.

"We do see that reflected in sterling."

The pound earlier traded as high as US$1.4339 after Britain's labour market data showed wage growth, which is closely watched by the Bank of England, slowed in the last quarter but picked up in December.

The number of people in employment rose to a record high of 31.42 million "(The labour market) is probably accelerating in underlying terms, and that's the most important criterion for the Bank of England," said RBC Capital Markets' head of FX strategy, Adam Cole.

"We still think we're overpriced for the risk of lower rates."

Sterling has fallen around 6 per cent against the dollar since mid-December as investors have pushed back bets on BoE rate rises to around 2020 and have moved to price in the chance of a cut in rates over the next year.

Consumers' expectations have also shifted: a survey of households showed on Wednesday that the number of Britons who expect the BoE to raise interest rates over the next 12 months has fallen to its lowest in more than two years.

All eyes are on a two-day European summit starting on Thursday at which British Prime Minister David Cameron will try to secure more favourable terms for Britain's membership of the EU.

Analysts say sterling could be knocked dramatically if Britons voted to leave in a referendum that could come as soon as June. Goldman Sachs has said the currency could fall as much as 15-20 percent, and ratings agency Standard & Poor's has said a Brexit could hurt the pound's role as a global reserve currency.

REUTERS