Sterling rises after UK economic data, US figures in focus

By Stefano Rebaudo

Dec 16 (Reuters) - Sterling rose against the euro and the dollar on Tuesday after recent losses, as UK data left expectations for a Bank of England rate cut unchanged and traders shifted focus to U.S. figures due later in the session.

Britain's unemployment rate climbed to its highest since early 2021, while the composite S&P Purchasing Managers' Index rose to 52.1 in December - above forecasts in a Reuters poll but still below its long-term average.

Yields on two-year gilts, which are more sensitive to BoE policy expectations, edged up 1.5 basis points to 3.77%, having been up 1 bp just before the PMI release.

Markets are pricing around 60 bps of BoE rate cuts by the end of next year and about a 90% chance of a cut on Thursday.

Sterling gained 0.25% to $1.3410 and was up 0.35% against the euro at 87.59 pence, after earlier touching 87.89 pence - its weakest since December 3.

The U.S. dollar index slipped, while the euro firmed slightly against the greenback.

"We continue to think the BoE will cut faster than markets currently price, with the Bank Rate declining to 3% by the end of 2026. The PMI data does not change that view," said Jefferies economist Modupe Adegbembo.

"The improvement in the headline (PMI) measure is welcome, but it still points to sluggish UK growth at best," she added, warning that the real risk was that "labour market deterioration deepens from here".

Barring a major data surprise before Thursday's decision, BoE policymakers are expected to vote 5-4 to lower the benchmark rate to 3.75% from 4.0%, according to most analysts polled by Reuters.

The final piece of the puzzle will be Wednesday's release of November CPI inflation figures.

"We revised down our forecasts for 2026 growth and inflation recently as our concerns shifted from persistent price pressures to the growing likelihood of a demand slump," said Berenberg economist Andrew Wishart.

"Indications that job losses are mounting give us greater confidence in our view," he added, forecasting three rate cuts in 2026 and confirming that view even after the PMI data.

(Reporting by Stefano Rebaudo. Editing by Mark Potter)