[LONDON] Sterling was flat on Wednesday after two sessions of gains as doubts emerged on whether entrenched expectations of higher UK interest rates were reasonable given a backdrop of uncertain Brexit negotiations.

Despite Brexit and falling projections for UK economic growth, futures markets are pricing in 50 basis points of Bank of England rate increases over the next year, the most in the developed world apart from Canada.

UK manufacturing output rose by a monthly 0.4 per cent in August, data showed on Tuesday, faster than a forecast of 0.2 per cent in a Reuters poll of economists.

The pound was little changed at US$1.3195 on Wednesday against a tepid US dollar.

"The pound has managed to remain fairly resilient despite the continued political breezes coming its way in the past week or so," said Michael Hewson, chief markets analyst at CMC Markets in London, who expects further gains to be limited unless sterling breaks through some key technical levels.

The outlook appeared fragile, with some market watchers including like Morgan Stanley preferring to sell sterling on rallies on Brexit worries.

"Should the start of the UK-EU (post-Brexit) trade deal be postponed, UK inward investment may suffer," analysts at the investment bank said in a note.

REUTERS