Sterling gains ahead of UK inflation data, BoE meeting this week

By Linda Pasquini

LONDON, Sept 16 (Reuters) - The British pound rose against the dollar on Monday, after closing slightly in negative territory last week, ahead of this week's UK inflation data and central bank meeting.

Sterling rose by 0.5% on the day to $1.3190, above the $1.3125 it recorded at Friday's close.

"Sterling is holding up quite well," said Niels Christensen, chief analyst at Nordea, with the general opinion being that the Bank of England would be "a little bit less aggressive" on rate cuts on account of an expected rise in core inflation.

The BoE is widely expected to keep interest rates unchanged this week after a 25-basis-point cut last month, although futures markets on Monday implied a greater chance for a rate cut of a quarter of a point, at about 38% versus 20% on Friday.

Inflation figures, released on Wednesday, will be a key set of data ahead of the BoE's policy announcement, after data from Britain's Office for National Statistics last week showed the economy stagnated unexpectedly in July.

"The expected rise in the core rate is one of the reasons why we do not expect a change in the key rate," said Volkmar Baur, FX strategist at Commerzbank.

"However, if this does not happen, the BoE's decision could become more difficult after the recent weaker economic data," Baur added.

The European Central Bank lowered interest rates by 25 basis points last week and signalled a "declining path" for borrowing costs in the months ahead as inflation slows and economic growth in the euro zone dwindles.

Against the euro, the pound was flat at 84.35 pence.

Meanwhile, the dollar weakened and the yen hit its highest level in more than a year on Monday, as market participants increasingly expected an oversized rate cut by the Federal Reserve later this week. (Reporting by Linda Pasquini Editing by Alex Richardson)