Sterling rose 0.9 percent against a broadly weaker dollar on Monday, helped by a robust reading of manufacturing sentiment, although concerns over increased public support for Britain's exit from the European Union checked gains. The pound has suffered since December on a mix of collapsing expectations for rises in Bank of England interest rates and worries that the "Brexit" debate this year will lead to a withdrawal - or at least halt inflows - of foreign capital.
Against the dollar, sterling was up at $1.4360, with subdued US manufacturing data also weighing on the dollar. The pound was flat against the euro at 76.03 pence per euro. Earlier, the purchasing managers' index of sentiment showed British factories enjoyed a bright start to the year, although companies cut staff at the fastest rate in three years and export orders fell.
"The British pound strengthened after the UK manufacturing PMI rose in January, pointing to a slight improvement in Britain's manufacturing sector at the beginning of the year," said Sakis Paraskevov, senior analyst at IronFX Global. But signs of muted price pressures that emerged in the survey could push back expectations of the first rate hike by the Bank of England, Paraskevov said. Currently, investors are pricing in a chance of a rate hike in the second half of 2017.
Moreover, increased uncertainty about growth and investments from the "Brexit" vote are likely to keep expectations of a rate hike rather muted, analysts said. "We expect that sterling will remain under pressure, particularly as Brexit premiums are priced into the currency market," said Kamal Sharma, a strategist with Bank of America Merrill Lynch in London.
"The overall risk outlook is also not conducive for any currency that is so dependent on capital inflows." A poll by YouGov on Sunday showed the biggest lead for "Brexit" supporters in more than a year over the rival 'in' campaign. Sharma also pointed to M4 money supply data, which showed net selling of UK government bonds by foreign investors in December after record purchases in October and November.
Credit Agricole Head of G10 FX Strategy Valentin Marinov said there was wide-ranging concern among its European banking clients about the British referendum on whether to stay in the EU, which could come as early as June. "Set against the background of the continuing migrant crisis, a potential Brexit was seen by many clients as a factor that could destabilise the EU in the future," he said. But Marinov also argued that those positioning against sterling could be squeezed by any deal at an EU summit later this month on changes to the terms of Britain's membership.