LONDON Sterling rose broadly on Tuesday, as stronger-than-expected UK manufacturing data left the currency buoyant in the face of headlines suggesting talks over Britain's exit from the European Union were likely to be difficult.
On the first day of trading after a long weekend across Europe, sterling rose against the dollar and the euro, after numbers showing UK manufacturing growth surged to a three-year peak in April, beating all forecasts.
Having briefly strengthened immediately after the data, the pound turned decisively higher by midday. It last traded up 0.3 percent at $1.2922, less than a cent off a seven-month peak versus the dollar, and was 0.2 percent higher at 84.42 pence per euro.
"Markets have been disillusioned because, when it comes to data, it's been showing a different picture to the doomsday scenarios that economists had predicted in the initial aftermath of Brexit," said Viraj Patel, currency strategist at ING, adding that sterling was likely to react more to positive data surprises than negative ones.
Numbers released on Friday showed speculators wound back their bets against the pound for a second week running in the seven days to Tuesday. [IMM/FX]
"It's hard for markets to continue hanging on to this sort of bearish outlook when the data's completely different (to what's predicted)," Patel said.
Traders and analysts put the pound's initial lack of momentum after the data down to political developments, particularly a string of Brexit-related headlines relating to a weekend summit, at which EU members laid out Brexit negotiating guidelines.
The other 27 EU members endorsed stiff exit terms for Britain on Saturday and warned Britons to have "no illusions" that a deal to retain access to European markets will be swift and easy.
That was followed, on Sunday, by a report in Germany's FAS newspaper of a difficult dinner between British Prime Minister Theresa May and the head of the European Commission, which increased fears that the two sides are talking past each other.
Commission President Jean-Claude Juncker was quoted saying he was "leaving Downing Street 10 times more sceptical than I was before".
Theresa May, who dismissed the FAS report as "Brussels gossip", told British voters on Tuesday that the 27 other EU countries were determined to win a Brexit deal that "works for them".
"The one thing that changed this weekend were the reports from FAS on Sunday about how fraught the dinner last Wednesday was, and therefore what you’ve seen with sterling showing a degree of weakness is definitely a shift," said Bank of New York Mellon's head of currency strategy, Simon Derrick.
Demand for sterling has increased since May called a snap election for June 8, with markets betting that would bring political stability and could strengthen Britain's hand in its exit negotiations with the EU.
(Reporting by Jemima Kelly and Ritvik Carvalho; Editing by Mark Trevelyan and Robin Pomeroy)