Sterling hits firmest level vs trade-weighted currencies since Brexit vote

LONDON (Reuters) - Sterling has hit its firmest level against a trade-weighted basket of currencies since shortly after Britain voted to leave the European Union in June, 2016, data showed on Wednesday, as the pound enjoys broad-based gains.

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

Growing expectations of an interest rate increase next month and a recent agreement on a transition deal for when Britain quits the EU next year, coupled with dollar and euro weakness have prompted investors to load up on the British currency in recent weeks.

A sterling trade-weighted index published by the Bank of England rose to its highest level since June 30, 2016, a week after the Brexit referendum.

Sterling also rose above $1.42 on Wednesday, despite disappointing manufacturing output data, leaving it not far from the $1.4346 post Brexit-vote peak against the dollar it hit in January.

“The currency faced a minor test when the latest data...showed a fairly sharp fall but it appears that it has not had a lasting effect in capping the recent strength,” said David Cheetham, market analyst at XTB.

British manufacturing output fell unexpectedly in February, its first drop in almost a year, according to official figures that added to signs that the economy may have slowed in the first quarter.

Wednesday’s data also showed another sharp drop in construction output, against expectations of a small rebound after a severe downturn in January.

The pound did initially trim gains but it later recovered, partly as the dollar sold off. It was up 0.3 percent at $1.4211 by 1450 GMT.

However, with bets on sterling at their most bullish in years and forecasters predicting more gains, the lacklustre data will encourage some investors to take profits after the recent rally.

“There is a lot of good news priced into sterling at these levels, whether from a political or a data perspective and markets are taking a pause,” said Timothy Graf, head of macro strategy EMEA for State Street Global Markets.

The British currency has been one of the best performers this year with gains of more than 5 percent against the dollar.

Sterling has been supported by expectations that the Bank of England will raise rates in May and hawkish comments by policymaker Ian McCafferty on Tuesday offered further encouragement.

The Brexit transition deal, secured by Prime Minister Theresa May in March, has also pushed back the risk of economic disruption linked to Britain’s EU departure.

The British currency has also chalked up impressive gains against the euro with the pair holding near a three-week low around 87 pence on Wednesday.

Reporting by Saikat Chatterjee; editing by John Stonestreet and David Stamp