LONDON: Sterling climbed against a broadly softer dollar on Wednesday as speculation over further US monetary stimulus increased, although the outlook for the pound was clouded by concerns the euro zone debt crisis would drag on the UK economy.
UK construction PMI data for May, due at 0830 GMT, was expected to show a decline from the previous month and add to the gloomy outlook for the pound.
However, analysts said the pound may not show a marked reaction to disappointing data as it was already within range of a five-month low of $1.5269, hit last week after dismal manufacturing figures.
Sterling was last up 0.6 percent against the dollar at $1.5479 after triggering stop loss buy orders at $1.5460, traders said.
"The dollar is generally on a weaker footing today. Expectations of the Federal Reserve easing policy are starting to negatively impact the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.
After a long holiday weekend in the UK, market players were still focused on Friday's US jobs data, showing the economy added fewer employees in May than expected and raising the risk of more quantitative easing.
But Hardman said recent poor UK data meant investors were also increasing bets on more stimulus from the Bank of England, while worries about the euro zone unravelling as a result of the debt crisis were likely to support longer-term demand for the safe-haven dollar.
"There are clear signs the UK economy is starting to slow down in line with the euro zone and that increases the likelihood of more quantitative easing from the BoE," he said.
BoE policymakers start their monthly two-day meeting on Wednesday, with an interest rate decision scheduled for Thursday. The bank is not expected to increase its QE total this month, although more stimulus could come later in the year.
The euro dipped 0.15 percent against the pound to 80.83 pence, retreating from a one-month high of 81.40 pence hit on Tuesday. A European Central Bank rate decision is due later in the day, with policymakers expected to keep rates on hold.
The common currency has come under heavy pressure in recent weeks from worries Spain could become the fourth euro zone sovereign to require a bailout and Greek political instability, helping boost demand for sterling.
"Continued concerns about the problems of Spanish banks and Greek elections create the potential for some flight capital from the euro zone to find its way into sterling, even if the economic consequences for the UK are negative," Lloyds analysts said in a note.
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