Sterling slips after UK services PMI misses forecast

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LONDON, March 4 (Reuters) - Sterling pulled back from near seven-year highs against the euro on Wednesday after data showed growth in Britain's dominant services sector eased in February.

The Markit/CIPS UK Services Purchasing Managers' Index (PMI) slipped more than expected to 56.7, from 57.2 in January, and well below a Reuters forecast of 57.5.

Sterling fell to a low for the day of $1.5326 from around $1.5357 before the data, leaving it 0.2 percent lower, and pared gains against the euro to trade at 72.56 pence per euro, compared with 72.45 pence beforehand.

"The pound has slipped after activity in such a key growth contributor fell below expectations," said Jameel Ahmad, chief market analyst at FXTM.

"This somewhat erases optimism that the UK economy was looking at scoring two hat-tricks of solid monthly PMIs in a row (construction, manufacturing and services)."

Data earlier this week showed growth in the construction sector reached a four-month high while manufacturing growth was at a seven-month peak in February. Growth in all three sectors beat expectations in January, reinforcing the view that the Bank of England could raise rates sooner than many anticipate.

The euro had earlier weakened to 72.37 pence, near a seven-year low, as traders geared up for the European Central Bank's asset buying programme, which is due to begin this month.

The weaker currency helped the euro zone's own PMI reading to a seven-month high in February, with business activity expanding in all the bloc's four biggest economies for the first time since last April.

Sterling has been amongst the strongest performing G10 developed world currencies over the past month, fuelled by expectations rates will rise early next year.

But an election in May, whose result is uncertain, is prompting investors, including hedge funds, to stay cautious.

"Hedge funds are weary of the pound ahead of the general elections in the UK on May 7," a note from Societe Generale (Paris: FR0000130809 - news) 's asset allocation team said. "The net short sterling positions were only slightly reduced in view of the recent strengthening of sterling but dangers lurk."

Investors are concerned by the prospect of heavier spending and taxes and more regulation of the financial sector under a possible centre-left Labour government.

They also worry that Britain could leave the European Union if the ruling Conservatives win. Under pressure from the anti-EU UK Independence Party, the Conservatives have promised a referendum on EU membership within two years if they win. (Reporting by Anirban Nag, editing by Nigel Stephenson and Catherine Evans)