Sterling touches 10-day high

Sterling briefly touched a 10-day high against the dollar on Monday after UK factory gate inflation hit a record in May, highlighting the Bank of England's dilemma as it struggles with inflation and slowing economic growth. The Office for National Statistics said output prices rose 1.6 percent in May, taking the annual rate to 8.9 percent.
Core output prices, which exclude food, drink, alcohol and tobacco, also surged 1.2 percent on the month, three times the rate predicted by analysts. Sterling, which has taken a battering from poor economic data spanning the housing, manufacturing, consumer and service sectors, jumped as the data confirmed policymakers' worries about inflation and reluctance to cut interest rates from the current 5.0 percent.
Steady British borrowing costs keep the pound's yield intact, but deeper concerns over the economy's ability to ride the crisis in global credit markets are undermining sentiment.
"The Bank of England are now in a bind, but will they hike rates? I don't think so. If you look at the GDP profile from the BoE, I think it will be weaker than that - there's a fairly high chance, 50/50, that the UK falls into recession," said Derek Halpenny, currency economist at BTM-UFJ.
The pound briefly hit the 10-day high at $1.9800 before trimming the gains to stand at $1.9741 by 1401 GMT, while the euro retreated sharply from earlier three week highs above 80 pence to 79.36. "The abysmal May producer price inflation further constrains the Bank of England's ability to deliver the interest rate cuts that the economy so badly needs," Global Insight chief economist Howard Archer said in a note to clients.
"Indeed, it seems ever more likely that the Bank of England will be unwilling to cut interest rates from 5 to 4.75 percent until the fourth quarter of this year, and even a move then is questionable."
UK investors are still reeling from a succession of poor economic data and renewed worries over the financial sector after last week's profit warning from UK buy-to-let lender Bradford and Bingley as it restructured its rights issue. Royal Bank of Scotland said 95.1 percent of shareholders had subscribed for its record 12 billion pound ($23.5 billion) rights issue, leaving about 730 million pounds of shares to be placed by underwriters.