Sterling hits three-week high, rebounding after weakest month in 10

LONDON (Reuters) - Sterling hit a three-week high on Friday, boosted by a stronger-than-expected business sentiment survey as well as a forecast-lagging U.S. non-farm payrolls report that knocked the dollar down.

The pound briefly looked as if it were set to top $1.30 after the U.S. numbers were published, jumping half a cent to $1.2995, its strongest since Aug. 14.

“If Federal Reserve policymakers were already starting to question the need for another rate hike this year – and the pace thereafter – then this week’s data won’t have made them feel any more comfortable,” said OANDA analyst Craig Erlam.

But the dollar did recover a little after the numbers, with the pound slipping back, trading at around $1.2950 by 1415 GMT. That still left it up 0.1 percent on the day, and came after a month in which it slipped 2.5 percent against the dollar – its worst month since October.

Earlier, a purchasing managers’ index survey showed Britain’s factory activity grew a lot more strongly than expected in August as work flowed in from home and abroad, suggesting the economy might be picking up speed after a slow first half of 2017.

That comes, however, after growing nerves around the Brexit process helped drive the pound’s biggest monthly fall in trade-weighted terms since last October.

“The PMI surprised on the upside, but the reaction is very muted. That tells you a lot,” said Thu Lan Nguyen, a strategist with Commerzbank in Frankfurt.

“Yes manufacturing in particular has been holding up extremely well. But what is more important is the medium- to long-term outlook for the economy which is quite uncertain.”

Chief EU negotiator Michel Barnier said on Thursday after four days of talks that Britain’s withdrawal negotiations with the European Union had failed to make the kind of progress needed to move into a new phase in October.

That leaves businesses and financial markets still faced with the risk of a “cliff-edge” fall into complex World Trade Organisation tariffs and procedures in March 2019.

Britain has raised the prospect of a transition period to smooth out the country’s departure from the trade bloc, but the EU says it will not discuss future arrangements until more progress has been made on a number of initial issues.