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Sterling up against euro in continued reaction to PMI

sterling--LONDON: Sterling rose against the euro on Thursday, continuing to be helped by better-than-expected UK manufacturing data released on Wednesday, although many investors were wary of the pound, awaiting more evidence of a pick up in activity.


A survey on Wednesday showed UK manufacturing activity at a 15-month high and raised hopes the economy may avoid a contraction in the fourth quarter. But there are few expectations the construction and services sectors will follow that robust performance.


 Construction PMI for December is due at 0930 GMT on Thursday while the more important services sector PMI is due on Friday. Both are expected to show a marginal improvement in activity so any disappointment could see sterling give up some of its gains.


The euro was down 0.1 percent at 81 pence, well below a eight-month high of 82.25 pence with near term support at its 55-day moving average of 80.86 pence.


"We are looking for euro/sterling to gradually ease back towards 80 pence," said Richard Driver, currency analyst at Caxton FX.


"The UK manufacturing sector data was good but it will be a real surprise if both construction and services sector PMIs are that good. Still, over the medium term we prefer sterling over the euro."


Analysts said they expected the euro zone economy to struggle much more than the UK in coming months as tough austerity measures and a sharp rise in unemployment across most of the currency bloc bite into economic output.


 That in turn is likely to keep expectations alive that the European Central Bank may cut its deposit rate -- the rate at which banks park their excess cash with it -- to negative. Such a move will weigh on the euro.


Against the dollar, the pound was down 0.15 percent at $1.6230, off a 16-month peak of $1.6380 hit on Wednesday after the US Congress averted recession-inducing budget cuts.


That fuelled appetite for currencies which typically benefit from expectations of global economic growth, including the pound. But some of the euphoria has faded as investors braced for political battles ahead over spending cuts.


Apart from the budget problems in the US, problems facing the UK and the euro zone -- Britain's biggest trading partner -- are also likely to keep investors wary of the pound.


 "With growth forecast of only 1 percent in 2013 and inflation around 3 percent these are hardly the ingredients for a strong currency," Commerzbank said in a note.


"Hence any significant rally (in sterling) in our view should be seen as a selling opportunity in the short term."

Center>Copyright Reuters, 2013


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