Sterling pauses on soft data

LONDON: Sterling trimmed gains on Wednesday after British manufacturing output fell unexpectedly in February, its first drop in almost a year, adding to signs the economy may have slowed in the first quarter.

With bets on sterling at their most bullish in years according to positioning statistics, and forecasters predicting more gains, the lacklustre data offered some investors an opportunity to take profits into a recent rally.

"There is a lot of good news priced into sterling at these levels whether from a political or a data perspective and markets are taking a pause," said Timothy Graf, head of macro strategy EMEA for State Street Global Markets.

The British currency has been one of the best performing this year with gains of more than 5 percent against the dollar. It hit a post Brexit-referendum vote high of $1.4346 in late January and is currently trading roughly 1 percent below those levels.

Sterling has been supported by expectations that the Bank of England will raise interest rates in May and comments by policymaker Ian McCafferty on Tuesday along with strong housing survey data on Monday offered further encouragement.

A Brexit transition deal, secured by Prime Minister Theresa May in March, has also pushed back the risk of economic disruption linked to Britain's EU departure, also helping sentiment towards sterling.

The British currency has also chalked up impressive gains against the euro with the pair holding near a three-week low around 87 pence.

Kit Juckes, an FX strategist at Societe Generale in London, said the pound's current valuation was cheap compared with much of the last two decades, and he expects it to strengthen to as much as 84 pence against the euro.

A trade-weighted index of the British currency rose to its highest level since the June 2016 Brexit vote.

Wednesday's data, along with figures for overseas trade, also showed another sharp drop in construction output, against expectations of a small rebound after a severe downturn in January.