LONDON (Reuters) - Sterling clawed back some ground against the dollar on Friday after U.S. data showed jobs growth slowing and unemployment rising in July, lessening the impetus for the Federal Reserve to raise interest rates any time soon.
At the end of a week in which figures showed the world's largest economy powering back in the second quarter, the latest U.S. data showed nonfarm payrolls increasing by a smaller than expected 209,000 last month, while unemployment crept up to 6.2 percent from 6.1 percent in June.
Sterling was dealt a blow earlier on Friday by data showing British manufacturing growing at its slowest rate in a year, dropping almost a cent on the day against the dollar and hitting a 2-1/2-week low against the euro.
Though it pared losses against the dollar after the soft U.S. data, the pound was still on track for a fourth consecutive week of losses, the weakest run since the start of 2013, shedding almost 1 percent over the past five days.
"There's probably some scope for some modest reversal on the dollar gains we've had, but I would emphasise the word modest," said Derek Halpenny, European head of markets research at the Bank of Tokyo-Mitsubishi in London.
"Generally the data is consistent with an improving labour market, and in that sense it keeps the potential there for the Fed to signal at some point over the coming months that rates might have to start moving sooner rather than later."
At 16:00 BST sterling was trading at $1.6833 (1.25 pounds), recovering from an earlier trough of $1.6812 but still down 0.3 percent on the day.
Some traders said that because the market already expected the Bank of England to be the first major central bank to raise interest rates since the financial crisis, it would need to see more evidence of the British economy's relative strength before sterling could go higher.
"We think the correction that is ongoing will extend," said Alvin Tan, a currency strategist at Societe Generale. "The market is quite long sterling - a lot of good news is baked into sterling’s price at the moment, in terms of market expectations of growth and also about the pace of BoE tightening."
The pound had fallen almost 0.2 percent against the dollar on Thursday after figures showed British consumer confidence falling in July for the first time in six months, with other data showing that the housing market may be starting to cool.
The euro hit a one-month high of 79.85 pence having risen steadily since the U.S. data, putting it up almost 0.7 percent against the pound, its biggest daily gain since early March.
One dealer said there had been talk in the market of a large portfolio order going through to the benefit of the euro against sterling.
Euro zone data showed manufacturing growth failing to accelerate as much as expected, offering sterling some support against the euro. But any gains evaporated on the back of the weak British and U.S. data.
The trade-weighted sterling index fell to 88.2, its lowest in over a month.
British government bond yields showed little reaction to the manufacturing PMI but fell sharply immediately after the U.S. jobs data, with the 10-year gilt yield ending at 2.583 percent, down 2 basis points on the day.
Editing by Alison Williams/Nigel Stephenson