Sterling rises as UK services data builds case for rate hike

LONDON (Reuters) - The pound rose on Wednesday after a survey showing Britain’s dominant services industry gained momentum last month fuelled expectations of a Bank of England interest rate hike this summer.

After a sluggish start to 2018, Britain’s economy is showing tentative signs of a recovery with surveys this week for the manufacturing, construction and services sectors beating expectations.

That has brought some respite for sterling after weeks weighed down by worries about whether Britain can secure a deal with the European Union before it leaves the bloc next March.

The IHS Markit/CIPS services Purchasing Managers’ Index (PMI) unexpectedly rose to an eight-month high of 55.1 in June, beating economists’ average forecast in a Reuters poll for it to remain unchanged at 54.0.

The pound rose to $1.3201, a five-day high, from $1.3176 before the data GBP=D3 and away from 2018 lows hit last week of $1.3050. Versus the euro the pound was up 0.2 percent at 88.18 pence EURGBP=D3

“The momentum continues for the British economy, the services PMI data has lifted hopes that the Bank of England will raise rates sooner rather than later,” said Naeem Aslam, chief markets strategist at Think Markets UK.

Markets are pricing in an 88-percent chance of a single 25-basis-point increase by the end of 2018 and a 53-percent chance of an August rate hike.

Last month BoE chief economist Andy Haldane joined two other members of the BoE’s nine-strong Monetary Policy Committee in calling for a rate rise, and official data was revised to show the first-quarter slowdown was less severe than first thought.

The pound has slumped recently because of weakness in the economy, a resurgent U.S. dollar and fears that Prime Minister Theresa May will run out of time to agree a deal with the European Union on its relationships after Britain leaves the bloc next year.

The currency weakened more than 6 percent between April and June, its worst quarter since the 2016 referendum to leave the EU.

On Monday it fell despite the relatively robust manufacturing survey data as investors worried about a looming a Brexit cabinet meeting later this week.

Reporting by Tom Finn; Editing by Toby Chopra