LONDON Sterling slipped against a buoyant dollar on Friday but flirted with its best week against the euro in three months, after solid year-end UK manufacturing and trade data allayed fears of an economic slowdown as the Brexit process gathers pace.
A number of forward-looking indicators of sentiment have dipped in the past 10 days, stirring nerves among investors that a weakening of growth predicted by many economists since the vote to leave the EU last June was finally materialising.
But manufacturing output rose 2.1 percent in December, far higher than the 0.5 percent rise forecast in a Reuters poll. Compared with December 2015, it was up 4.0 percent, the strongest increase since April 2014.
Meanwhile, Britain's goods trade deficit fell to 10.89 billion pounds in December, narrower than a forecast of 11.5 billion in the Reuters poll.
"The upside surprise on manufacturing, in particular, was strong enough to suggest there is a chance that GDP could be revised up," said Allan Monks, UK economist at JP Morgan.
"While some of the consumer data have turned weaker lately, the manufacturing data leave the risks around our first quarter GDP forecast clearly to the upside," he said.
At 1600 GMT the pound was down 0.1 percent on the day against the dollar at $1.2480, having traded in a range of $1.2439-$1.2521 on Friday.
Sterling's upside was capped after Britain's Reckitt Benckiser agreed to buy U.S. infant formula maker Mead Johnson Nutrition for $16.6 billion, potentially fuelling corporate demand to exchange sterling for dollars.
The euro was down 0.2 percent on the day at 85.06 pence. Sterling was on course to end the week up nearly 1.5 percent against the euro, which would mark its biggest weekly rise since Nov. 7-11.
On a trade-weighted basis, sterling has now risen three of the last four weeks.
The BoE last week said it now expects economic growth of 2.0 percent this year, higher than the forecasts of all but one of 50 economists polled by Reuters last month and up sharply from its previous forecast of 1.4 percent.
"So much for the Brexit meltdown," ETX Capital senior market analyst, Neil Wilson, said. "Today's data confirm that the UK economy remains very resilient and lends support to the Bank of England's decision to revise up its 2017 growth outlook."
Yet the Bank is in no rush to raise rates. Deputy Governor Jon Cunliffe warned this week that British business investment is likely to remain very weak in the near term after June's Brexit referendum.
Sentiment remains largely driven by domestic politics and the near-daily twists and turns in the Brexit process.
The head of the European Commission's office in Britain said on Friday it is unrealistic for Britain to expect to negotiate its exit from the EU and reach a free trade agreement in two years and both will probably need an implementation phase.
(Writing by Jamie McGeever; Editing by Tom Heneghan)