LONDON: Sterling rose against a struggling euro and recouped losses against the dollar on Monday, with a robust pace of expansion in the UK manufacturing sector underpinning the currency.
The Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) inched down in May to 57.0, as expected in a Reuters poll but stayed well above the 50 line that divides growth from contraction.
In the U.S., manufacturing sector expansion fell well short of expectations. The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.2 last month from 54.9 in April, falling short of the 55.5 expected according to a Reuters poll
That saw U.S. yields drop and weighed broadly on the dollar.
In afternoon trade, sterling rose against the dollar to trade at $1.6755 after the US manufacturing sector data, having traded as low as $1.6725 earlier in the day.
The pound rose against a euro under broad selling pressure ahead of widely expected policy easing by the European Central Bank this week.
"As long as euro/sterling is broadly under pressure it's not correct to talk about sterling weakness," said Nick Parsons, global head of forex for National Australia Bank in London.
The euro was down 0.1 percent at 81.25 pence, with the final reading of the manufacturing Purchasing Managers' Index (PMI) for the euro zone disappointing.
Additionally, data from Germany on Monday showed annual inflation in Europe's largest economy was slowing, suggesting subdued price pressures in the euro zone. Euro zone inflation data is due out on Tuesday and a soft number will add pressure on the ECB to loosen policy aggressively.
In Britain, the construction and the services sector PMIs will be released on Tuesday and Wednesday respectively and both are likely to confirm the diverging outlooks for the UK and the euro zone economies.
"Construction and services PMI will need to beat forecasts for sterling to make a move on $1.68, as investors crave some direction in these lacklustre trading conditions," said Alex Edwards, head of corporate desk at UKForex.
Sterling had run up to a 5-1/2 year peak against the dollar earlier in May. Over the last year the pound has appreciated some 10 percent against a basket of currencies on the growing assumption that the improving economy and red-hot housing market would force the Bank of England to raise rates faster than its euro zone and U.S. peers.
But a less febrile housing market has tempered more aggressive expectations on when the BoE will start raising interest rates and encouraged traders to cash in on that rally.
Latest data showed mortgage approvals fell to a nine-month low in April, the Bank of England said, suggesting new measures to control mortgage lending were leaving their mark.
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