LONDON: Sterling hit a two-month high against the euro on Monday after a UK manufacturing survey bolstered expectations of monetary tightening earlier than flagged by the Bank of England.
The euro fell to 84.72 pence after the Purchasing Managers' Index (PMI) survey was released from 84.955 pence beforehand. The survey showed that new orders and output hit their highest levels in nearly two decades in August.
Sterling rose to $1.5594 from $1.5553 beforehand. The pound was also buoyed by prospects of merger and acquisition-related inflows as Vodafone, a British company, neared the sale of its 45 percent stake in Verizon Wireless to Verizon Communications for $130 billion.
The stronger-than-expected PMI data drove the 10-year British gilt yield to its highest since July 2011 at 2.856 percent. That pushed the yield gap between 10-year British gilts and German bunds to three-year highs.
The spread between the interest rate sensitive two-year gilts and German bond yields also picked up, giving the pound a boost.
"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.
The final reading of Germany's manufacturing PMI rose to 51.8 in August from 50.7 in the previous month, but was slightly lower than the preliminary reading of 52.
The UK services sector PMI is due later this week and is expected to show growth. Earlier in the day, a survey showed British manufacturers are planning the fastest increase in capital investment in the year ahead since before the financial crisis.
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