Sterling inches higher after upbeat week of data

[LONDON] The pound inched higher on Friday, a week of generally upbeat business sentiment surveys pushing it towards recent highs around US$1.2950 as Prime Minister Theresa May's Conservatives gained more than 100 seats in local elections.

Sterling has surged almost 3 per cent 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.

But there are still nerves. Sterling dropped briefly earlier this week after Mrs May accused EU officials of trying to interfere in an election polls show she should win by a landslide. That may bode ill for negotiations with Brussels set to begin in earnest afterwards.

"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 US$1.30-US$1.31 but it does need a catalyst for us to get there - maybe the election is it."

By 0824 GMT, sterling was up just over 0.1 per cent on the day at US$1.2935. It gained 0.2 per cent to 84.82 pence per euro.

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 Mrs May, who has made sound management of the economy a central plank of her election campaign.

While tough language on the EU had prevented the pound from extending its run of 2017 highs, "setbacks have been mild with the pound benefiting from offsetting flow from a solid run of UK PMI data this week," analysts from currencies exchange LMAX said in a morning note.

"This latest push through US$1.2775, the December 2016 peak, is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base (for the pound)."

REUTERS