Sterling strengthens, aided by brighter prospects for UK economy

LONDON, April 2 (Reuters) - Sterling rose against the dollar and the euro on Wednesday, helped by solid construction data for March, a sign of robust economic growth in the first quarter.

The improved outlook kept alive the chances that the Bank of England may have to tighten monetary policy in the next 12 months.

UK's construction Purchasing Managers' Index (PMI), a survey of 170 construction companies, edged down to 62.5 in March from 62.6 in February but remained far above the 50 mark, which denotes growth.

It was only slightly lower than forecasts from a Reuters poll of 63.0, although optimism about the months ahead reached its highest in more than seven years.

The construction PMI came a day after another PMI survey showed British manufacturing unexpectedly cooled in March to its slowest pace in eight months. Still, investors preferred to pay attention to the brighter spots in construction, for now.

The euro was trading down 0.2 percent at 82.755 pence. Against the dollar, sterling was up 0.1 percent at $1.6645, with the dollar failing to get much traction from a private sector survey of the U.S. jobs market.

"Although not quite as high as the 63 reading the markets were expecting, (the UK construction PMI) still points to a very solid first-quarter GDP figure with a preliminary reading of at least 0.7 percent expected," said Alex Edwards, the head of the corporate desk at UKForex.

Investors were looking to buy pounds on dips, on expectations the UK economy will do better than the euro zone in coming months. That would put upward pressure on gilt yields and making sterling more attractive, traders added.

With companies looking to hire more employees, wages are also showing signs of picking up, boding well for overall demand in the economy.

"In an environment of improving labour market conditions, price developments should increasingly stabilize, especially if consumption holds up. We remain of the view that sterling dips should be bought, for instance against the dollar," said Manuel Oliveri, currency strategist at Credit Agricole (TLO: ACA.TI - news) .

At the same time, investors remain cautious about the euro, as euro zone policymakers are trying to tame the euro's recent strength. Inflation in the euro zone also fell to its lowest level since November 2009 in March.

ECB policymakers meet this Thursday, facing the dilemma of whether to take more action to spur growth and weaken the currency, which is near 2-1/2-year highs on a trade-weighted basis.

A Reuters poll released on Wednesday showed the euro is expected to drop to 82.7 pence in a month, 81.2 pence in six and just 79.5 pence in a year's time, little changed from a month ago. (Reporting by Anirban Nag; Editing by Larry King and Sonya Hepinstall)