By Joice Alves
LONDON (Reuters) - Sterling rose on Friday to a two-and-a-half week high against a weakening euro after various business data showed some evidence that Britain's economy was more resilient than feared in December.
Britain's construction sector showed signs that it might have seen the worst of a slump caused by interest rates surging to a 15-year high of 5.25% in August.
The S&P Global/CIPS UK construction Purchasing Managers' Index (PMI) rose in December to 46.8 from November's 45.5 but remained below the 50.0 growth threshold for a fourth month in a row.
The all-sector PMI, combining the construction data with services and manufacturing figures released this week, rose to 51.7 in December from 50.2 in November, its highest since June.
Separate data from mortgage lender Halifax showed that British house prices rose in annual terms in December for the first time in eight months, adding to signs of a stabilisation in the property market.
In the meantime, an industry body said the British new car market witnessed its best year since the COVID-19 pandemic as easing supply chain issues helped fulfil pent-up demand for fleet vehicles.
The pound rose 0.14% against the euro to 86.19 pence. Against a strengthening dollar, it fell 0.13% to $1.2665.
Jane Foley, head of FX strategy at Rabobank, said it is still difficult to paint an optimistic picture for the sterling outlook, but she expects the euro to remain under pressure against the pound on a 12-month view amid ongoing struggles facing the bloc's largest economy.
The euro zone inflation surged last month, while the contraction in euro zone business activity continued due to a persistent downturn in the dominant services industry.
"We expect that Germany’s economic issues will weigh on the euro sentiment going forward and allow GBP to take back some ground," said Foley.
Supporting sterling, traders are cutting back expectations of Bank of England (BoE) rate cuts this year. They now see around 120 basis points of cuts in 2024, compared to 140 bps expected on Thursday, according to money market pricing.
Official data published last month suggested the UK economy could already be in a mild recession, while inflation in the UK fell more than expected in November to 3.9%, from 4.6% in October.
But the BoE said it expects to keep rates elevated for some time to ensure that the 2022 surge in inflation is well in the past.