Sterling nears $1.36, hits three-month high as dollar weakens

LONDON (Reuters) - Sterling kicked off the first trading day of 2018 by climbing to a three-month high close to $1.36 on Tuesday, with investors brushing off weaker-than-expected manufacturing data to focus on upcoming Brexit talks.

British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

The pound, which in 2017 recorded its best annual performance against the dollar since 2009 with an almost 10 percent rise, added to those gains on Tuesday.

It climbed as much as 0.7 percent to $1.3598, its strongest since Sept. 20, as the dollar weakened across the board.

Numbers showing growth in British manufacturing cooled last month from four-year highs had little impact on the currency. The monthly manufacturing purchasing managers’ index (PMI) came in at 56.3, at the bottom end of forecasts in a Reuters poll of economists but still well above the 50-level denoting growth.

“It’s a difficult one to react to because yes it’s a disappointment, but it’s still a stunningly good figure,” said Rabobank currency strategist Jane Foley. “It’s difficult to sell the pound on the back of that number.”

“I get the sense with sterling that there is a ‘wait and see’ attitude,” she added. “We all know that Brexit remains an enormous theme for sterling, particularly the start of the trade talks, and the market does need to wait to gauge the tone of those talks.”

Foley added that German Chancellor Angela Merkel’s success in forming a governing coalition so as to secure a fourth term in office could also be crucial for sterling, because of a market perception that she was something of an ally for Britain and would want to get the country a favourable trade deal.

Exploratory talks between Merkel’s Christian Democrats and the Social Democrats are scheduled from Jan. 7 to Jan 12.

Against the euro, sterling strengthened 0.2 percent to 88.71 pence.

“As always, the course of Brexit negotiations will be important and developments in the coming weeks will be important given we expect a transition deal to be struck quickly,” wrote MUFG currency strategists in a note to clients.

“We remain sterling bulls and continue to expect the pound to break above the $1.40 level,” they added.

Brexit minister David Davis said on Tuesday that Britain wants to include financial services in a trade deal with the European Union which covers a full sweep of economic areas, and that any deal that left out the sector would be “cherry-picking”.

Editing by Catherine Evans