* Euro recovers as CPI rise fuels rate hike expectation
* Egypt unrest worries subside but traders cautious
* Pound hits 10-week high as BoE rate hike view simmers
By Masayuki Kitano
SINGAPORE, Feb 1 (Reuters) - The euro crept back near a
two-month high on Tuesday after a jump in euro zone inflation
fuelled expectations of a rate hike and as worries about unrest
in Egypt abated slightly.
Analysts said the euro could add to its gains in the
near-term, especially if European Central Bank President
Jean-Claude Trichet talks tough on inflation after the ECB's
policy meeting on Thursday.
A key will be whether the euro manages to break
above last week's two-month high of $1.3760, said Andrew
Robinson, FX market strategist at Saxo Bank in Singapore.
"I think if we break there, then we have every chance to
squeeze up to maybe the $1.39 to $1.3950 level, which is the
next Fibonacci level for that latest down move," he said.
The 76.4 percent retracement of the euro's November to
January slide lies right around $1.3950.
Some market players say the euro could even rise towards
$1.40 in the weeks ahead, provided the trouble in Egypt does not
spread to other countries.
The euro rose 0.2 percent from late U.S. trading on Monday
to $1.3722 .
The euro edged higher after data on Monday showed
that consumer prices in the euro zone rose 2.4 percent
year-on-year, holding above the European Central Bank's target
of just below 2 percent for the second month.
The data helped lift the three-month Euribor rate
, the benchmark short-term interest rate for
European money markets, to 1.074 percent, its highest since July
2009.
The euro's yield advantage over the dollar -- as measured by
the difference between two-year German and U.S. bond yields --
has also widened over the past month, and is now hovering near a
two-year high touched last week. .
Easing worries about the euro zone sovereign debt
crisis and growing expectations that the ECB could hike rates
sooner than the U.S. Federal Reserve have supported the euro in
recent weeks.
WILL EURO REBOUND LAST?
There were doubts, however, about how long the euro's rally
may last.
Gareth Berry, G10 FX strategist for UBS in Singapore, said
worries about the debt crisis could come back to haunt the euro,
adding that the UBS forecast was for the euro to be trading at
$1.25 at the end of April.
In addition, current market expectations about the possible
pace of ECB rate rises seem excessive, Berry said.
Overnight index swaps are now implying that market players
expect the ECB to raise interest rates by roughly 75 basis
points in the next 12 months, exceeding the pace of tightening
they expect from central banks in Australia and New Zealand, he
said.
"I think it's very likely that Trichet is going to sound
more hawkish. But there's a big difference between sounding
hawkish and actually delivering a rate hike," Berry added.
Sterling rose 0.2 percent to $1.6051 , supported by
market expectations that British interest rates may rise as
early as the first half of the year.
Sterling hit a 10-week high of $1.6073 earlier on Tuesday,
having extended its gains after surging 1 percent on Monday.
The Australian dollar held firm after the Reserve Bank of
Australia (RBA) ended its monthly policy meeting with a
generally upbeat assessment of the domestic and global economy.
The RBA kept its key cash rate unchanged at 4.75 percent,
saying the impact of flood damage in Queensland would be
temporary and it was still very much focused on the medium-term
outlook for solid growth.
The Australian dollar extended its gains after triggering
stop-loss bids and last stood at $1.0025 , up 0.5
percent on the day.
The dollar fell 0.3 percent to 81.83 yen , having
touched a one-month low of 81.75 yen earlier on Tuesday.
(Additional reporting by Hideyuki Sano in Tokyo, Wayne Cole in
Sydney, and Reuters FX analyst Rick Lloyd in Singapore; Editing
by Alex Richardson)
(masayuki.kitano@thomsonreuters.com; Reuters
Messaging: masayuki.kitano.thomsonreuters.com@reuters.net;
+65-6417-4682))
