May 5, 2017 / 8:46 AM / 3 months ago

Sterling hovers just below $1.30 after upbeat week of data

3 Min Read

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Patrick Graham and Jemima Kelly

LONDON, May 5 (Reuters) - The pound inched higher on Friday, a week of generally upbeat business sentiment surveys pushing it towards recent seven-month highs close to $1.30, as Prime Minister Theresa May's Conservatives made strong gains in local elections.

Sterling has surged around 3.5 percent against the dollar since May announced surprise national parliamentary elections two weeks ago, read by markets as a move that will strengthen her hand in Brexit talks over the next 18 months.

Record bets against the currency made by hedge funds and other speculative investors since last June's Brexit referendum seem to have topped out, encouraging many to cash in by buying back the pound.

It hit a seven-month high of $1.2965 last week, and traded just below that level on Friday at $1.2956, up 0.3 percent on the day.

But some strategists said that two straight weeks of short positions being unwound meant that sterling would need fresh drivers to push any higher.

"It must be noted that speculative positioning in sterling has reached more balanced territory. This suggests that fresh buying, as for instance driven by higher rate expectations, may be needed in order to trigger more sustained currency upside from here," wrote Credit Agricole currency strategists.

Data this week has also again driven back the doomsayers who warn that rising inflation and the impact of Brexit on jobs, immigration and investment will weaken the UK economy in the months ahead.

The Markit/CIPS Services Purchasing Managers' Index (PMI), a closely watched gauge of the services sector that dominates Britain's economic output, rose to a four-month high of 55.8 in April, above all forecasts in a Reuters poll of economists.

The reading was the second strongest since mid-2015 and another boost for May, who has made sound management of the economy a central plank of her election campaign.

There are still nerves. Sterling dropped briefly earlier this week after May accused EU officials of trying to interfere in the election.

But polls show she should win by a landslide, and any uncertainty over that view was removed on Friday as the Conservatives won hundreds more local council seats.

"Right now it seems hard to justify getting bearish again on the pound," said ING strategist Viraj Patel.

"Markets are unwinding their short positions, trying to get to a neutral level. That is probably around $1.30-$1.31 but it does need a catalyst for us to get there - maybe the election is it."

Sterling gained 0.3 percent to 84.80 pence per euro. (Editing by Ed Osmond)

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