LONDON (Reuters) - The pound languished near six week lows on Friday following a general dollar rebound as the impact of a cold weather bout on the British economy tested widespread optimism about the British currency.
Since Britain signed a transition agreement last month for exiting the European Union, concerns about Brexit have abated as investors focus on the state of the UK economy before an expected interest rate rise in May.
Sterling forecasts are at their highest since Britons voted in 2016 to leave the European Union, a Reuters poll found on Friday.
That is partly a result of optimism driven by progress in divorce talks and expectations of another interest rate rise next month, the poll said.
But major banks are sceptical about the ability of the pound to rise further.
“The positive Brexit news has largely been priced in, and with the most challenging issue over Northern Ireland remaining unresolved, we view the balance of risks as increasingly negative,” Hans Redeker, global head of currency strategy at Morgan Stanley in London, said in a note.
Sterling’s four-day rally against the dollar ended on Thursday as the dollar rose to a two-week high against a basket of currencies, encouraged by signs the United States is looking to resolve a trade dispute with China. <FRX/>
On Friday the pound was flat against the dollar at $1.4004 and against the euro at 0.8739. Sterling had slumped 0.7 percent against the dollar to $1.3982 on Thursday reaching its lowest level since March 19.
Traders this week largely shrugged off disappointing survey data and searched instead for more meaningful signs of economic weakness that could deter the Bank of England from its path of monetary tightening.
However, a survey on Thursday showing the IHS Markit/CIPS services Purchasing Managers’ Index (PMI) tumbling to a worse-than-expected 51.7 from February’s reading of 54.5 because of weak consumer demand, and bad weather did appear to weigh on the currency.
Britain’s construction PMI showed a similar drop on Wednesday, although manufacturing held up better.
Besides the China-U.S. trade issue, currency traders said they would be looking for cues on Friday from U.S. jobs data and comments by Federal Reserve Chairman Jerome Powell.
Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
Editing by Andrew Bolton