March 1, 2012 / 9:16 AM / 6 years ago

Sterling near 3-1/2 mth high vs dlr; eyes PMI

* Sterling pauses after rally to 2012 peak vs dlr

* BoE’s King, Weale comments weigh on QE expectations

* UK manufacturing PMI for February due 0928 GMT

By Nia Williams

LONDON, March 1 (Reuters) - Sterling edged higher against the dollar on Thursday, trading near a 3-1/2 month high hit a day earlier as investors scaled back bets on more quantitative easing in the UK, and looked set to stay supported ahead of PMI data later in the session.

Manufacturing PMI data for February, due at 0928 GMT, was forecast to dip slightly from the previous month to 51.8 but remain above the 50 level that demarcates expansion from contraction.

A reading in line with, or better than, forecasts could add to hopes the UK economy will avoid slipping into recession and reduce expectations the Bank of England will pump more money into the economy to stimulate growth.

BoE governor Mervyn King nudged the bar higher for more monetary easing on Wednesday, when he told lawmakers the bank will be guided by upcoming data when deciding whether to print more money.

His comments helped sterling rally to a 3-1/2 month high against the dollar of $1.5993, before paring gains.

The pound was last up 0.1 percent at $1.5941. Technical strategists said Wednesday’s close above the 200-day moving average at $1.5905 and subsequent move above $1.5990 opened the door for a test of $1.6080.

“More strength in data today would add into the view of this week that the BoE is done for the time being. In the very short-term I would still be a buyer of sterling on pullbacks,” said Audrey Childe-Freeman, head of currency strategy at J.P. Morgan Private Bank.

Childe-Freeman said sterling’s outperformance on Wednesday meant it may struggle to gain strongly unless PMI data was significantly better than forecast, but the paring back of QE bets would support the UK currency.

Policymaker Martin Weale reinforced King’s comments in a speech later on Wednesday, when he said the BoE would probably have no reason to sanction an expansion of QE when current purchases are complete in May, despite headwinds to consumer spending.

Quantitative easing is usually considered negative for a currency as it involves flooding the economy with cash, which can crimp demand. Policymakers expanded asset purchases by 50 billion pounds in February, and some market players speculated there may be more easing to come later in the year after minutes showed two members voted for a increase of 75 billion pounds.

Sterling was close to flat against the euro at 83.66 pence following a rally on Wednesday that pushed the single currency below key support around 84 pence.

The euro came under broad pressure after a massive injection of cheap funds for the European Central Bank.

Analysts said the break below 84 pence could mark the start of more sustained weakness for the euro, which could be reinforced if investors seeking to cut exposure to the euro zone debt crisis continued to buy UK assets.

“Its safe-haven status will likely mean GBP will remain well supported should the sentiment remain subdued, and the downside bias in EUR/GBP will likely continue,” said Lloyds strategists in a note. (Editing by Anna Willard)

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