Sterling rallies

Sterling rose against the dollar and euro on Tuesday after UK services sector data surprised on the upside and prompted a bout of short-covering among investors, although further gains looked limited by an overall gloomy outlook for economic growth. The Markit/CPIS headline PMI index for June nudged up to 53.9 from a three-month low of 53.8 in May, defying expectations of a fall to 53.5 and catching some investors off guard.
Sterling jumped roughly a cent to a session high of $1.6128 against the dollar after the data as investors rushed to cover short pound positions taken in anticipation a weak PMI number. But it gave up gains to last trade flat on the day at $1.6086. Technical analysts said a break above $1.6120 would enable a move higher, while $1.5987 - the intra-day low on July 7 - was a key level on the downside.
"The rally in sterling corresponded to the release in PMI. The market had gone short and there was a squeeze on positions," said Paul Robson, currency strategist at RBS. A breakdown of the PMI showed the rate of services sector expansion remained below trend while job creation remained minimal and confidence had fallen.
Taken alongside a recent drop in UK manufacturing growth and a subdued construction sector, Tuesday's data highlights the UK's sluggish economic recovery, which will keep UK interest rates low and sentiment weak for the pound. The euro fell 0.6 percent against sterling to last trade at 89.81 pence, but remained in sight of a 15-month high of 90.84 pence hit last Friday.
The single currency was hampered by eurozone business surveys showing services growth slowed to the weakest pace since October in the face of sluggish new orders and rising interest rates. Sterling's rally pushed its trade-weighted index against a basket of currencies up to 78.1, up from 77.6 hit earlier in the day. While trade-weighed sterling rose on Tuesday, it remains not far from 77.5 hit late last week, its lowest since late March 2010.