Sterling index hits 10-week high as UK factory activity surges

By Jemima Kelly

LONDON, Nov 2 (Reuters) - Sterling hit a 10-week high on a trade-weighted basis on Monday after data showed British factory activity unexpectedly surged in October, suggesting economic growth could pick up in the last three months of the year.

The monthly Markit (NasdaqGS: MRKT - news) /CIPS UK Manufacturing Purchasing Managers' Index (PMI) jumped to 55.5 in October, its highest in 16 months and well above even the highest forecast of 52.5 in a Reuters poll, helped by a recovery in export orders.

The survey indicated that Britain's economy could grow twice as fast in the last three months of the year as it did in the third quarter, data compiler Markit said, though many economists will wait for Wednesday's survey of the much bigger services sector to gain a fuller picture of the pace of recovery.

The main focus for the week will be the following day, when the Bank of England releases its latest quarterly Inflation Report as well as an interest rate decision and the minutes from the latest meeting of its Monetary Policy Committee (MPC (KOSDAQ: 050540.KQ - news) ).

Credit Agricole (Swiss: ACA.SW - news) 's head of G10 currency research, Valentin Marinov, said that the manufacturing data would add to the constructive picture painted by the Bank of England of a domestic demand-driven recovery in Britain.

"But we shouldn't forget that the Bank of England is also monitoring inflation and the strong pound is quite instrumental in determining the outlook for inflation in the near term," he said. "More accentuated sterling gains in the very near term would risk triggering a dovish response by the BoE on Thursday."

Sterling strengthened to 71.07 pence per euro after the data, up 0.4 percent against the currency of its main trading partner. That helped the BoE's trade-weighted sterling index also to reach its highest in ten weeks, at 93.50.

Against the dollar, sterling rose 0.4 percent on the day to $1.5498, its highest in 11 days.

While a majority of economists polled by Reuters expect only Ian McCafferty to vote again for an immediate rate rise at this month's MPC meeting, there is a chance that fellow committee members Kristin Forbes and Martin Weale could join him.

"Our economists expect the BoE to continue forecasting a modest inflation overshoot for 2017/18, which could force some re-pricing in the rates market and boost the pound. We remain short on euro/sterling spot with a 70 pence target," wrote BNP (Paris: FR0000131104 - news) Paribas strategists in a research note. (Editing by David Goodman)