Sterling rose to its highest in nearly two weeks against the dollar on Monday after a stronger-than-forecast manufacturing industry survey prompted market players to take a slightly brighter view of the UK economy. The manufacturing purchasing managers' index (PMI) came in at 49.5 in August, easily beating forecasts of 46.0, and leaving it just short of the 50 level that divides contraction from expansion.
Signs that the manufacturing sector is stabilising raised prospects that the UK economy is emerging from a recession, although strategists said PMI data from the dominant services sector, due out on Wednesday, would give a better indication of growth. Sterling jumped to $1.5906 from around $1.5868, before stalling near strong technical resistance at $1.5912, the August 23 high. It was last trading at $1.5885, up 0.15 percent.
The euro fell 0.2 percent to 79.12 pence, holding around its 55-day moving average. More near term support is expected around its August 30 low of 79.025 pence. "This suggests maybe the UK is breaking away a bit from Germany and the rest of the euro zone, whose PMI numbers were very weak, and sterling has really reflected that," said Kathleen Brooks, research director at Forex.com.
"If the services PMI gets above 53.3 - the high from May - it could send us flying above $1.5912 and open the door to $1.60." Services make up the bulk of UK gross domestic product and the PMI survey for the sector is forecast to show a rise to 51.1. A strong number will bolster the chances of a robust recovery in the third quarter, lower chances of more easing by the Bank of England and push the pound higher, traders said.
In contrast, bets that the US Federal Reserve will opt for another round of monetary easing to boost the economy in the near term are weighing on the dollar. The pound rallied in line with other perceived riskier currencies on Friday when a speech by Fed chairman Ben Bernanke prompted market players to sell the dollar on expectations further US monetary stimulus could be announced very soon. Euro zone manufacturing PMI data painted a gloomier picture than the UK survey, but strategists said sterling would struggle to rally much against the euro in the run-up to a European Central Bank policy meeting on Thursday.