LONDON (Reuters) - Sterling strengthened against the dollar and the euro on Friday as data showed UK manufacturing growth picking up speed in May while Italy’s political crisis dominated the market psyche.
The pound languished near a six-month low of $1.3205 for much of the week, curtailed by weakness in the UK economy and influenced by non-UK factors including new U.S. trade tariffs and possible snap elections in Italy.
On Friday, however, it was headed for its biggest daily gain in eight weeks. It climbed 0.5 percent to a five-day high $1.3360.
Against the euro, sterling strengthened 0.7 percent to 87.26.
The single currency was hurt by news that European Union lawmakers from two parties forming Italy’s new government coalition had backed a proposal to help countries quit the euro.
“The limelight is elsewhere right now and sterling is being tossed this way and that by market-moving factors overseas,” WorldFirst head of FX strategy Jeremy Cook said.
But other analysts said the pound had been helped by data showing that the economy was strengthening somewhat after a sluggish first quarter.
Growth among British manufacturers picked up speed in May for the first time in six months, but the improvement masked underlying weakness, a survey showed on Friday.
“Given the lack of any other real catalyst, it will be the data that will dictate which way sterling goes,” said Viraj Patel, an FX strategist at ING in London.
But he said fraught Brexit politics could weigh on sterling in the next couple of weeks.
Risks around the sort of relationship Britain can agree with the EU for after Britain leaves the bloc continue to influence the pound.
The United Kingdom will attempt to break the deadlock in the Brexit negotiations with a proposal to give Northern Ireland joint UK and European Union status so that it can trade freely with both, a UK official said on Friday.
Northern Ireland, which will have the UK’s only land frontier with the European Union after Brexit in March 2019, remains the most difficult issue in talks between Brussels and London, and a threat to peace in the region.
The pound had been one of the best-performing currencies in 2018 but it has given up all its gains for the year following a broad rally in the dollar and signs Britain’s economy is slowing.
The main reason for sterling’s fall has been a drastic shift in market expectations for interest rate rises from the Bank of England (BoE) because of economic weakness.
Investors are pricing in a one-in-three chance of the BoE raising borrowing costs in August - the next time it updates its economic forecasts.
Reporting by Tom Finn; Editing by Robin Pomeroy