Sterling rose to a 2-1/2 month high against the dollar on Wednesday after data showed British manufacturing contracted less than expected, reducing the chance of more stimulus from the Bank of England. By contrast, the Federal Reserve is expected to maintain its ultra-loose policy after a set of weak data in the United States, including a below-forecast private sector jobs figures on Wednesday, keeping sterling underpinned in the near term.
Sterling could extend its gains in the coming days if the Fed issues a soft-toned statement after its meeting later in the day and if British construction and services data on Thursday and Friday add to the view the British economy is gaining some strength.
Sterling last traded at $1.5570, having risen as high as $1.5597 just after the US data, which showed hiring slowed to the lowest in seven months in April. Traders reported an option barrier at $1.5600 which was checking gains for now.
Most of the gains for sterling came from a stronger than expected Markit/CIPS Manufacturing Purchasing Managers' Index for April, which put the sector within a whisker of the 50 line that separates growth from contraction. "Sterling was supported by today's PMI data and ... given the dollar remains under pressure I could imagine it rising to $1.56-$1.57," said Paul Robson, currency strategist at RBS Global Banking. He said, though, that the overall market positioning remains short sterling versus dollar, and he would consider recommending new short positions if the sterling rose to those levels.
In the longer term, analysts expect the British economy to underperform the US one. Kathleen Brooks, research director at Forex.com, said resistance provided by the 50 percent Fibonacci retracement of the January to March fall at $1.5587 looked strong and more evidence that the British economy was gaining momentum was needed for a sustained break.
"We think this period of slowdown in the US is temporary, whereas we expect UK growth to remain subdued," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi. "We don't anticipate $1.60 unless we have broad dollar weakness." Recent data, including better-than-expected first-quarter economic growth numbers, helped the pound post its best monthly performance in April since October 2011.
The euro was little changed at 84.84 pence, with traders citing an option barrier at 85 pence, which could keep the pair around that level. The European Central Bank is widely expected to cut interest rates on Thursday and this could see the euro slip against sterling in the near term.
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