Pound retreats on manufacturing data

LONDON (Reuters) - The pound retreated from a two-month peak above $2 set earlier on Wednesday as a surprisingly strong U.S. manufacturing survey contrasted with news of contraction in that sector in Britain.

The UK manufacturing PMI fell to 45.8 in June, its lowest since December 2001, and the May figure was also revised down to show contraction.

Initially though investors focused on the index components showing input prices and output prices rising at their fastest rate since the respective series began in 1990s -- taking this as a sign that the Bank of England won't cut rates anytime soon.

But the ailing health of the UK manufacturing sector was brought back into focus -- to sterling's detriment -- by the release of the comparable index for the United States, which proved surprisingly strong.

"The sterling story is very ugly and I would expect it to stay that way," said John Hardy, FX strategist at Saxo Bank, adding that sterling's early gains had been driven by scaling back of overextended short positions on the currency.

By 3:10 p.m. sterling was steady on the day at $1.9936, having retreated from an earlier two-month peak of $2.0006. The euro was flat at 78.71 pence.

Also on Tuesday, the Nationwide building society said house prices fell 0.9 percent in June, a touch less than the 1.0 percent consensus, but still notching up their eighth monthly fall in a row to stand more than 7 percent below the peak hit last year.

The Bank is widely expected to hold rates at 5 percent on July 10, but the outlook is less clear with most economists expecting the next move to be a cut while markets are pricing in a hike.

(Reporting by Toni Vorobyova; editing by Stephen Nisbet)