Sterling hits six-week high vs euro, slips against recovering dollar

LONDON (Reuters) - Sterling hit a six-week high against the euro on Thursday as jitters ahead of the first round of the French presidential election and a week of upbeat data in the UK gave the British currency some respite from Brexit worries.

The euro lost ground versus sterling this week over the rise of Jean-Luc Melenchon, a far-left candidate in the French presidential race, while steady inflation readings and forecast-beating wage growth numbers gave the pound a lift.

Sterling was up 0.2 percent at 84.87 pence per euro, earlier touching 84.76 pence, its highest level since Feb. 27.

“Obviously the French political risk concerns are quite large,” said Alvin Tan, currency strategist with Societe Generale.

“If we continue to see Melenchon improving his position in the polls into the first round, it will weaken the euro and that will weaken euro/sterling.”

Centrist Emmanuel Macron and far-right leader Marine Le Pen are still frontrunners in the French race, but Melenchon, who for most of the campaign has been dismissed as a distant no-hoper, has surged into the top four and lies just a few percentage points behind the leaders. A four-way contest in the election could heighten uncertainty over its result for investors who have grown wary of polls.

Set for a fourth successive daily gain versus the dollar in early London trade, the pound lost momentum as the greenback recovered from a dip following U.S. President Donald Trump’s comments on its strength.

It last traded at $1.2522, down 0.2 percent on the day, but still up 1 percent for the week.

The pound’s fall of nearly 20 percent since last year’s Brexit vote has benefited exporters, but driven up domestic inflation, thus squeezing consumers’ spending power - a concern for investors who saw robust consumption as a factor propping up Britain’s economy after the EU referendum.

Consumer prices in Britain increased in March by 2.3 percent compared with a year earlier - above the Bank of England’s target - while earnings including bonuses rose by an annual 2.3 percent in the three months to February.

British manufacturers reported the fastest export growth in more than two years in early 2017 and the services sector also recovered to rack up its strongest sales growth since last June’s Brexit vote, a business survey showed on Thursday.

“A weak sterling over the past few months will continue to fuel inflationary pressure ... So high inflation at a time when wage growth is stagnant doesn’t bode well for UK consumers over the long-term horizon,” said Piotr Matys, currency strategist with Rabobank.

For graphic on sterling and gilt yields click on bit.ly/2dgAXn1

For graphic on wWorld FX rates in 2017 click on tmsnrt.rs/2egbfVh

For graphic on trade-weighted sterling since Brexit vote click on tmsnrt.rs/2hwV9Hv