May 4, 2017 / 8:24 AM / 3 months ago

Sterling climbs back above $1.29 on strong services data

An English ten Pound note is seen in an illustration taken March 16, 2016.Phil Noble/Illustration

LONDON (Reuters) - Sterling rose above $1.29 on Thursday after stronger-than-expected data from Britain's huge services sector, which was seen bolstering the case for the Bank of England to raise interest rates sooner rather than later.

The Markit/CIPS Services Purchasing Managers' Index (PMI), a closely watched gauge of Britain's services industry, rose to a four-month high of 55.8 in April, above all forecasts in a Reuters poll of economists.

The reading was the second strongest since mid-2015 and a boost for Prime Minister Theresa May who is seeking to persuade voters that the opposition Labour Party cannot be trusted to run the economy after a parliamentary election on June 8.

Since that snap poll was called last month, the pound has climbed almost 2.5 percent against the dollar, on the view that May's Conservative party will increase its majority, bringing stability and diluting the influence of eurosceptics who advocate a "hard Brexit".

The pound was up 0.4 percent on Thursday at 1.2919 per dollar and approaching a seven-month high of 1.2965 hit last week on market optimism around the election.

The services sector PMI followed better-than-expected manufacturing and construction surveys. Taken together, they indicate the economy is growing at a quarterly pace of 0.6 percent at the start of the second quarter, double the pace of the first quarter.

"The UK economy scored a hat-trick of good news this week," said Fawad Razaqzada, a market analyst at Forex.com.

"The key question was how the dominant services sector performed amid the Brexit uncertainty and ahead of the general elections in June. Well, apparently, very well."

The Bank of England - which will have noted this week's PMI surveys - is expected to keep interest rates at their record low through this year and possibly until 2019, as it steers the economy through the uncertainty of Britain's exit from the EU.

One rate-setter voted last month for a hike, however, and others said they might follow soon if there were signs the economy was maintaining its momentum from 2016.

"The strengthening in the pound, in line with the upside surprise to the PMI data, is consistent with the fact that this puts more pressure on the Bank of England next Thursday to be more hawkish," said Sam Lynton-Brown, strategist at BNP Paribas, referring to the Bank's policy meeting and quarterly inflation report next week.

"Although this is a one-off release, having this strong a release ahead of the inflation report is likely to have an outsized impact on sterling over the next few days."

Against a broadly stronger euro, however, the pound inched down 0.2 percent to 84.72 pence per euro..

Editing by Richard Lough

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