Strong data helps limit damage to struggling sterling

By Marc Jones

LONDON, Jan 5 (Reuters) - Sterling slipped back against the dollar and took its biggest tumble against the yen in over two weeks on Thursday, although more upbeat UK economic data, this time from the dominant services sector, helped limit the damage.

The services Purchasing Managers' Index (PMI) beat all forecasts, showing the key engine of the economy grew in December at the fastest rate since mid-2015. A run of economic surveys this week have shown no impact yet from the UK's soon-to-start Brexit negotiations.

The PMI (Other OTC: PMIR - news) release lifted sterling back above $1.23 from $1.2280 beforehand and roughly halved its losses on the euro and the yen to leave it at 85.27 pence per euro and buying 143.53 yen.

The pound had been having its worst day against both in two weeks, buffeted by wider FX markets turbulence after China orchestrated a sharp jump in the yuan.

If the data continues to be strong "it should question many analysts' view that the pound will be sluggish," said Nordea bank FX Strategist Aurelija Augulyte. "We would love to see cable (GBP/USD) at $1.25 within a couple of months."

Traders were also digesting news from late on Wednesday that a senior career diplomat, Tim Barrow, had been appointed as envoy to the European Union after the previous ambassador had suddenly quit and criticised the government's Brexit plans.

The pound tumbled 16 percent against the dollar and 14 percent against the euro in 2016, its worst annual performance in eight years, with the bulk of those falls coming after Britain voted on June 23 to leave the European Union.

Uncertainty over how Britain leaves the bloc and worries over the likely economic impact are continuing to weigh on the currency but the run of positive data surprises are now raising questions for analysts.

"Sterling lately seems to have become be a bit low-beta against the dollar so the move here has been about this crazy intervention from China, which has halted the dollar rally and forced a lot of position squaring," said Saxo bank's head of FX strategy John Hardy. (Reporting by Marc Jones; Editing by Catherine Evans)