April 5, 2018 / 9:06 AM / in 4 months

UPDATE 2-Sterling posts biggest drop in 6 weeks on econ worries, dollar

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

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

By Tommy Wilkes and Saikat Chatterjee

LONDON, April 5 (Reuters) - Sterling fell on Thursday and was set for its biggest daily drop in six weeks thanks to a general dollar rebound as trade war concerns eased and after a survey showed British services growing at their slowest since the Brexit referendum vote.

The dollar extended gains to a two-week high against a basket of currencies, bolstered by a rebound on Wall Street and signs the United States is looking to resolve a trade dispute with China.

“It is a broad dollar rebound story and that is also pulling the euro higher against the pound with investors turning more bullish on the euro in the short term than on the British currency,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

Sterling fell 0.7 percent against the dollar to $1.3982, its lowest level since March 19. Against the euro, it weakened 0.2 percent to 87.40 pence.

Underlying sentiment on the euro against sterling was also bolstered by expectations that sovereign wealth fund bids were supporting the British currency.

Heavy snow - brought by the “Beast from the East” cold weather bout - and weak consumer demand weighed on services in March, with the IHS Markit/CIPS services Purchasing Managers’ Index (PMI) tumbling to a worse-than-expected 51.7 from February’s reading of 54.5.

Britain’s construction PMI showed a similar drop on Wednesday, although manufacturing held up better.

Traders this week have largely shrugged off the data as they focus on any signs economic weakness could steer the Bank of England from its path of an expected interest rate rise in May.

Jordan Rochester, an FX strategist at Nomura, said the pound’s reaction to the data was only marginal as the survey showed input prices rising, which pointed to inflation remaining above target and the BoE needing to act.

“It won’t have much of an impact on the May BoE hike. As a policymaker you would look through the weather-related weakness,” he said.

The predicted rate rise in May is largely baked into sterling’s price, and combined with Britain agreeing a Brexit transition deal last month and dollar weakness caused the trade dispute with China have kept the pound above $1.40.

“Fingers will point to the Beast from the East, but my sense is longer-term underlying issues remain in play, especially given this is the weakest number since the Brexit vote,” said Neil Jones, head of FX hedge fund sales at Mizuho bank. (Reporting by Tommy Wilkes and Saikat Chatterjee Editing by Robin Pomeroy)

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