Sterling rose against both the dollar and euro on Friday after UK factories reported the fastest rise in output for 10 months in February, assuaging some fears over the economy as Britain prepares for trade talks with the EU.
'Flash' early readings of the IHS Markit/CIPS UK Purchasing Managers' Index (PMI) showed the expansion of Britain's vast services sector slowed slightly this month, but this was cancelled out by an unexpected upturn in manufacturing.
The manufacturing PMI rose to its highest level since April and beat all forecasts in a Reuters poll, although there were signs that the coronavirus outbreak might have an impact on production in Britain.
Sterling, which was already trading higher against a broadly weaker dollar, rose to hit the day's high of $1.2977. It last traded 0.7% higher at $1.2966.
Against the euro, the pound rose to a day's high of 83.46 pence.
The UK survey chimed with other gauges which show the economy has picked up since Prime Minister Boris Johnson's election victory in December, even though the level of the PMI remains below its long-run average.
Jane Foley, head of FX strategy at Rabobank, said the PMI data was reassuring for the UK as it heads into trade talks with the European Union and noted strong PMI readings from Germany, France and the wider euro zone were also helping sentiment.
Business activity in the euro zone accelerated more than expected this month, a survey showed. "That too is a positive story for the UK because if Germany is more exposed to a slowdown then that would bode poorly for the UK economy," Foley said.
Athanasios Vamvakidis, Bank of America's global head of G10 FX strategy, said his clients have started buying the pound more and more recently and intensely selling the euro. "That said, for the UK there are still a lot of concerns about politics. Next month we have the start of the trade talks. And I think they are going to take a lot of attention," Rabobank's Foley said.
According to two-thirds of economists polled by Reuters, the transition period for Britain and the European Union to thrash out a trade deal will not be pushed beyond December, resulting in a goods-only agreement when they part ways.
"I would throw caution to the wind now," said Jordan Rochester, currency strategist at Nomura, noting that the impact from China's coronavirus on the European economy is yet to show through. On top of that, investors are too optimistic about how loose Britain's fiscal policy will be under its new finance minister, Rishi Sunak, Rochester said. "I'd be advising to sell the pound here as we are."
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