March 1, 2012 / 11:26 AM / 5 years ago

Sterling near 3-1/2 mth high vs dlr; QE bets trimmed

* Sterling edges higher, in sight of 2012 peak vs dlr

* BoE's King, Weale comments weigh on QE expectations

* Euro likely to find support vs sterling around 83.33 pence

By Nia Williams

LONDON, March 1 (Reuters) - Sterling rose against the dollar on Thursday, shrugging off slightly weaker-than-expected manufacturing data to trade near a 3-1/2 month high hit the previous day as investors scaled back bets on more quantitative easing in the UK.

The manufacturing PMI survey ticked down to 51.2 in February, below forecasts of 51.8, but held above the 50 level that divides expansion from contraction.

Analysts said the slowdown was slightly disappointing but not severe enough to shake the view that the UK economy will dodge a recession.

Better data in recent weeks has pared expectations that the Bank of England will pump more money into the economy to stimulate growth. BoE governor Mervyn King nudged the bar higher on Wednesday when he told lawmakers the bank will be guided by upcoming data when deciding whether to print more money.

His comments helped sterling rally to a 3-1/2 month high against the dollar of $1.5993, before paring gains.

The pound was last up 0.2 percent at $1.5942. Technical strategists said Wednesday's close above the 200-day moving average at $1.5905 and climb above $1.5990 opened the door for a test of $1.6080, near the mid-November high.

"You have to look at (the data) on the back of the big increase last month. We could now have consolidation at an okay level indicating trend growth which we would be happy about," said John Hydeskov, chief analyst at Danske Markets.

"The idea of a mild, technical recession has been put to bed. I think we'll make a test of $1.60 relatively soon."

Policymaker Martin Weale reinforced King's comments in a speech later on Wednesday, when he said the BoE would probably have no reason to sanction an expansion of QE when current purchases are complete in May.

Quantitative easing is seen as negative for a currency as it involves flooding the economy with cash, which can crimp demand. Policymakers expanded asset purchases by 50 billion pounds in February, and some market players speculated there may be more easing to come later in the year after minutes showed two members voted for a increase of 75 billion pounds.

Danske Bank's Hydeskov said policymakers may aim for a "soft landing" in QE and vote for another smaller injection of 25 billion pounds later in the year, but market expectations would be further diminished if there is robust data from the dominant services sector next week.

EURO PRESSURED

The euro fell 0.1 percent against sterling to 83.58 pence, extending losses from Wednesday when the single currency came under broad pressure after a massive injection of cheap funds for the European Central Bank.

Some analysts said the break below 84 pence may mark the start of more sustained weakness for the euro, which could be reinforced if investors seeking to cut exposure to the euro zone debt crisis continued to buy UK assets.

But Lee McDarby, head of corporate dealing at Investec Bank PLC, said the euro was likely to find strong support from UK importers around 83.33 pence, the level that corresponds with 1.20 in sterling/euro.

"It seems right now there is a better sentiment around sterling and the LTRO should drift euro lower. But on the import side people will buying euros around 83.33 pence, it's a massive psychological level for them," McDarby said. (editing by Ron Askew)

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