LONDON: Sterling rose to two-month highs against the euro on Monday, driven by recent upbeat UK data and widening gaps between British and German government bond yields.
The yield gap between 10-year British gilts and comparable German bunds rose towards recent three year highs. The gap between the interest rate sensitive two-year gilts and German bond yields also picked up, giving the pound a boost.
Sterling was also buoyed by prospects of merger and acquisition-related inflows after Vodafone, a British company, neared the sale of its 45 percent stake in Verizon Wireless to Verizon Communications for $130 billion.
The euro, which posted its worst monthly performance in a year in August, was down 0.3 percent at 85 pence, having fallen to 84.85 pence earlier in the day, its lowest since July 3. Near term support is cited at its 200-day moving average of 84.81 pence.
The pound was up 0.3 percent at $1.5550, extending gains from last month when it posted its biggest monthly gains since April. The pound rose last month as investors appeared sceptical whether the Bank of England will be able to keep rates near record lows given a recent uptick in economic activity.
A survey released on Monday showed British manufacturers are planning the fastest increase in capital investment in the year ahead since before the financial crisis. On Friday, data showed UK mortgage approvals hit a five-year high in July, while consumer confidence in August soared to a near four-year high.
All of which saw speculators trim bets against the pound in the week to August 27.
"We continue to hold short euro/sterling," said Alvin Tan, currency strategist at Societe Generale. He expected continued outperformance of the UK economy relative to the euro area and these would be highlighted in the purchasing managers indices.
The final reading of German manufacturing PMI rose to 51.8 in August from 50.7 in the previous month, but was slightly lower than the flash reading of 52.
UK PMI surveys for August are due this week and the manufacturing, construction and services sectors are forecast to show growth. The manufacturing PMI is due for release at 0828 GMT.
A better set of data will further push up short term money rates in the UK and challenge BoE Governor Mark Carney's forward guidance plan. Under the plan, Carney has pledged to keep the bank rate at a record low of 0.5 percent and monetary policy loose until the jobless rate drops to 7 percent.
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