Sterling falls vs dollar before manufacturing PMI

LONDON: Sterling fell against the dollar on Monday, tracking a drop in the euro as optimism following last week's euro zone agreement on tackling the debt crisis waned and as investors awaited a key survey on UK manufacturing activity.

The purchasing managers' survey on manufacturing for June, due at 0828 GMT, is expected to rebound to 46.5 from 45.9 in May. That would still leave the index well below the 50 level that separates growth from contraction.

A weak reading would add to expectations that the Bank of England will opt for further asset purchases under its quantitative easing programme to boost growth at its policy meeting later this week.

Analysts expect a decision to expand QE would weigh on the pound although the impact could be limited because further monetary easing is already widely expected.

"I think it would be very surprising if the Bank didn't do additional asset purchase this week. I don't see today's PMI will change that in any way even if it was a slightly surprising number on the upside," said Michael Derks, chief currency strategist at FXPro.

Sterling was down 0.4 percent against the dollar at $1.5642 , off a peak of $1.5718 hit on Friday as the market cheered moves to ease the euro zone debt crisis.

European leaders surprised markets last week by agreeing to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states.

But questions remained over whether the EU summit had addressed structural problems in the euro zone, which encouraged investors to take profits on last week's gains in riskier assets.

FXPro's Derks said the pound could succumb to further profit-taking in the short term, pushing it down towards $1.56.

The euro was up 0.15 percent against the pound at 80.75 pence, though it stayed below chart resistance around 81.00 pence and the June 11 high of 81.63 pence. Traders cited reported offers ahead of 81.00 pence.

Longer-term, the pound was expected to continue to gain against the euro as investors seek alternatives to the common currency.