By Amanda Cooper
LONDON (Reuters) - The pound was one of the standout performers against the dollar on Wednesday, after a survey showed business activity in the UK is outpacing that of major European economies, thereby adding to the case for British rates to stay higher for longer.
The preliminary S&P Global/CIPS UK Composite PMI, which spans services and manufacturing firms, rose to a seven-month high of 52.5 in January, up from December's 52.1 and above forecasts for a slightly smaller increase to 52.2.
Meanwhile, the flash reading for the euro zone showed business activity shrinking for an eighth month, albeit at a slightly slower pace.
The pound was last up 0.45% at $1.2743, narrowly behind the yen in terms of performance, as the Japanese currency logged a 0.6% gain on the day versus the dollar.
Sterling rose by as much as 0.2% against the euro to its strongest since last September. It was last up 0.1% at 85.51 pence.
Francesco Pesole, FX strategist at ING, said the euro/sterling pair in particular had gained after the surveys.
"That’s because the UK PMIs in the current environment look quite encouraging… I think when you compound what we saw in inflation lately, and you have better PMIs, they’re probably offsetting the poor retail sales that we had in the UK for December," he said, referring to an unexpected drop in consumer spending last month.
“So ultimately with Fed pricing that continues to move towards the dovish side on easing, the market is not really comfortable pricing in more easing from the Bank of England,” he said.
The Bank of England meets next week to discuss monetary policy. The expectation baked into markets right now is for UK rates to start to decline in June, with little chance of a drop before then.
This is in contrast to market-based expectations for the European Central Bank, which meets on Thursday, and the Federal Reserve, both of which are expected to have already cut at least once by June.
Higher interest rates means more incentive for non-UK based investors to own sterling, rather than another currency.
Weekly futures data from the U.S. markets regulator shows speculators hold their largest bullish sterling position since last September.
At $2.44 billion, it has doubled in the space of three weeks, in particular as various readings of inflation continue to show price pressures across many parts of the economy.