Pound climbs to five-week high even as UK data mixed bag

London - The pound rose to a five-week high against a weaker dollar as investors covered short positions and UK manufacturing data beat expectations.

Sterling headed for its third weekly gain against the dollar and hit $1.32, as the greenback dropped against all its Group-of-10 peers.

Data showed UK manufacturing rose in July for the first time this year, while the construction sector shrank for a fourth consecutive month.

“The market has been caught short by a bout of reasonable UK data as well as the realization that Brexit is a lengthy process whose immediate impact on the pound is difficult to predict as yet,” said Valentin Marinov, head of G-10 foreign-exchange strategy at Credit Agricole SA’s corporate- and investment-banking unit in London.

“In all, sterling still looks very cheap against the dollar and moderately cheap against the euro.”

The pound rose 0.8% to $1.3200 as of 13:22, touching the highest level since August 3. It extended its gain this week to 2%. Sterling strengthened 0.5% to 91.32 pence per euro, leaving it little changed this month.

Sterling’s gains against the dollar are coming amid speculation over the Federal Reserve’s plans and tensions with North Korea that are weakening the US currency. Over the past month, the pound has been outperformed by almost all of its G-10 peers.

The pound faces “significant stumbling blocks” against the euro over the next few weeks as Parliament returns from recess, according to strategists from BNY Mellon. Potential flashpoints include the September round of EU negotiations and comments from the Conservative party conference, they said in a research note.

Meanwhile, economic data could continue to weigh on the British currency, according to strategists. The size of the UK’s trade deficit shows “that the economy still is failing to rebalance despite the huge fall in sterling,” said Pantheon Macroeconomics economist Samuel Tombs in a note.

UK data in general remains weak and “the case for a much firmer pound over time on the basis of what’s happening in manufacturing seems a bit flimsy, ” according to Steven Barrow, a Standard Bank strategist.

Gilts fell for the first time in four days, with the benchmark 10-year yield rising one basis point to 0.98%.

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