LONDON (Reuters) - Sterling weakened on Tuesday after growth in Britain's manufacturing sector unexpectedly cooled in March to its slowest pace in eight months.
The purchasing managers index (PMI) figures - which also saw February's reading revised downwards - gave investors pause for thought even though the British economy remains one of the fastest growing in the developed world.
"The manufacturing PMI was disappointing. The UK economy is supposed to be on a course of better growth, which is the trend, but today was a bit of a setback," said Neil Jones, head of hedge fund FX sales at Mizuho in London.
At 1430 GMT sterling was 0.2 percent lower on the day against the dollar at $1.6628, having peaked at around $1.6675 before the PMI survey. The euro was up a third of one percent at 82.95 pence.
The heavily traded gilt future settled 8 ticks lower on the day at 109.45, while the new 30-year future rose 6 ticks to 108.32 on its second day of trading.
The pound was the biggest gainer among major currencies in the second half of last year, driven by expectations that an improving economy would lead the Bank of England to begin raising rates in the first half of 2015.
Earlier on Tuesday Deutsche Bank's chief UK economist George Buckley raised his 2014 growth forecast for the economy to 2.9 percent from 2.7 percent and brought forward his call for the first rate hike by six months to May next year.
The question for sterling is how much these bullish expectations are already factored into its price. It has struggled to make further progress since mid-February, with many players saying the results of surveys like Tuesday's PMIs may have peaked, casting some doubt on the strength of the recovery.
This week's market debate, however, is dominated by U.S. jobs data due on Friday and a policy meeting of the European Central Bank a day earlier.
The next upside target for sterling against the dollar is $1.6750 and the downside for the euro around 82.50 pence before a test of the year's low of 81.50 pence, said Mizuho's Jones.
Stephen Gallo, a strategist at BMO in London, agreed that $1.6750 is a near-term target for sterling bulls, and said support should emerge around $1.6600.
Reporting by Jamie McGeever and Patrick Graham; Additional Reporting by Ana Nicolaci da Costa; Editing by Catherine Evans