Sterling hits 1-month high vs euro, UK outlook brighter

Fri Nov 2, 2012 9:26pm IST

* Euro falls to one-month low below 80 pence

* Better data cuts bets on more stimulus from BoE

* Strong U.S. jobs data lifts dollar broadly

By Anooja Debnath

LONDON, Nov 2 (Reuters) - Sterling hit a one-month high against the euro on Friday, helped by better-than-expected UK construction activity data that added to optimism about prospects for an economic recovery.

The pound retreated against a broadly stronger dollar however, after stronger-than-expected U.S. jobs data brightened the outlook for the world's largest economy.

UK construction PMI data for October rose above expectations to 50.9, which indicated expansion in the sector, although firms said they remained cautious about future growth.

The euro fell to 79.96 pence, its weakest since Oct 3, before paring losses to last trade down 0.2 percent on the day at 80.06 pence. Traders cited euro zone exporter bids at 79.80/90 pence.

In contrast to the upbeat UK report, data showed euro zone manufacturing shrank for the 15th month running in October as output and new orders fell.

"Today's data has restored and refreshed sterling's post third quarter GDP rally," said Nawaz Ali, UK market analyst with Western Union Business Solutions.

"Weak manufacturing PMI data yesterday had led traders to question the sustainability of any recovery going into the fourth quarter but today's data is certainly a positive surprise."

Data last week showed the UK economy had emerged from three quarters of recession, prompting many market players to cut bets on further monetary easing from the Bank of England next week.

In contrast, the euro zone economy almost certainly slipped back into recession in the third quarter, with only feeble growth expected next year.

The single currency has also come under pressure from uncertainty about when Spain might ask for a bailout, and concerns about Greece's ability to implement austerity measures needed to secure more financial aid.

U.S. JOBS BEAT FORECASTS

Sterling fell 0.5 percent versus the dollar to $1.6039 after U.S. non-farm payrolls showed 171,000 jobs were added last month, beating expectations for 125,000.

The pound had rallied to a two-week high of $1.6176 on Thursday, and market players said some investors were taking profit on those earlier gains.

Sterling has been in demand from Asian central banks and other long-term investors in recent days following hopes the UK recovery will gather pace.

Friday's UK construction figures followed recent better-than-expected consumer credit, mortgage and CBI retail sales data.

The next focus for investors is PMI data from the dominant services sector on Monday, followed by a BoE rate decision on Thursday, when policymakers will also announce whether they are expanding their 375-billion-pound asset purchases programme.

"A few bits of data have been positive and that's been the trigger for people to pull back on (easing) expectations. I think it will be mildly positive for sterling," said Michael Sneyd, FX strategist at BNP Paribas.

Monetary easing tends to be considered a negative for a currency as it increases the supply.

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