* Sterling gains vs euro despite factory output data
* BoE rate decision 1100 GMT; rates and QE seen on hold
* Pound slips vs dollar, tracking moves in EURUSD
By Nia Williams
LONDON, April 5 (Reuters) - Sterling hit a 2-1/2 month high against the euro on Thursday, shrugging off a surprise drop in UK factory output that raised doubts over recent signs of economic recovery.
The Bank of England was expected to make no changes to interest rates at its monthly meeting.
UK manufacturing output slumped by 1.0 percent in February after a January’s figures were revised downwards, giving an annual decline of 1.4 percent. It was the biggest monthly fall in almost a year and confounded economists’ forecasts of a 0.1 percent rise.
Despite the sharp fall, analysts said the factory output data was outweighed by a marked improvement in UK services, construction and manufacturing PMIs (purchasing managers’ indexes) this week that fuelled hopes the country could avoid slipping into recession.
The euro fell 0.2 percent against the pound to 82.48 pence, after earlier rising briefly on the factory output data. The next key support level was seen at the 82.22 pence January low, with significant buying interest from corporates reported around 82.00 pence.
“There has been limited market reaction to the data. The fact we have had a hat-trick of three strong PMIs is more important,” said Michael Sneyd, FX strategist at BNP Paribas.
Strong UK PMI numbers contrasted with euro zone PMI surveys which have edged below 50, marking a contraction in activity and fanning demand to buy the pound against the euro.
Sneyd said sterling was also being driven by moves in the euro versus a strengthening dollar, with the shared currency coming under pressure as Spanish bond yields rose.
The pound fell 0.3 percent against the dollar to $1.5830, triggering reported stops below the 200-day average at $1.5848.
The dollar has rallied broadly this week after minutes from the Federal Reserve’s March meeting on Tuesday showed only two of the 10 policy-setting committee members saw the case for additional monetary stimulus in the light of an improving economy.
Despite the improvement in UK PMI data, the BoE’s Monetary Policy Committee is expected to keep rates on hold at a record low of 0.5 percent.
The total amount of the bank’s asset purchases, aimed at stimulating growth, is also forecast to remain unchanged at 325 billion pounds.
Analysts said the BoE decision was unlikely to give much of a boost to the pound. Although signs of a modest economic recovery have reduced the need for more quantitative easing, which involves printing more money and can crimp demand for a currency, policymakers would be wary of choking off tentative growth by tightening policy.
“The MPC has two modes - to leave policy on hold or to ease more, so sterling is not going to get much help from the UK side,” said Kit Juckes, currency strategist at Societe Generale. (Editing by Jeremy Gaunt.)