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The pound jumped to a six month high against the US dollar this morning amid hopes that the recovery is gaining momentum. It hit $1.5963 which is the strongest level since early February and traded at a one month high of 1.2083 against the euro. Investors are betting on the UK’s economy outpacing the US recovery, which economists fear is only months from slipping back into recession. The question is can sterling push on past 1.60?

British Manufacturing had another good month with production rising in July for the fourteenth consecutive month, although at a slightly slower pace with Eurozone wobbles weighing on exports. The Markit/Chartered Institute of Purchasing and Supply (CIPS) manufacturing PMI fell to 57.3 in July, from 57.6 in June, beating a consensus forecast of 57.0. This reading remains well above the 50 mark that divides contraction from expansion. The index held close to May’s 15-year high of 58.1 and a jump in new orders growth from June’s level suggested the slight dip merely marked a stabilisation at a high level.

The pound was also help by HSBC, the UK’s largest bank that reported pre-tax profits of £7bn for the first six months of 2010 - more than double its profits for the same time last year. The bank said it was profitable in every region, except for North America where it saw losses of $80m. Shareholders will receive a second dividend this year, totaling $1.4bn. HSBC have been quick to comment on the fact that new loans to small companies were up by 38% and is bankrolling 2,500 start-ups a week. This was a poignant response to Mervyn Kings comments last week about banks unfairly turning away viable businesses and highlights that in this case his theory is not proven. The UK’s other major banks Lloyds, Barclays and RBS are due to report their results later this week. Unlike Lloyds and RBS, HSBC survived the financial crisis without receiving direct government support. In a sign of the improving conditions in the banking sector, it said the amount of money set aside to cover bad loans had fallen to $7.5bn - the lowest level since the crisis began in 2008.

The Euro stayed near three month highs against the dollar after improvement in risk appetite and the release of positive manufacturing data from Europe. Meanwhile, the dollar hovered near three month lows against a basket of currencies following Bernanke’s comments indicating the US economy is still far from a full recovery, forcing the Fed to keep interest rates low.

The Bank of England and the European Central Bank are scheduled to announce the results of their policy deliberations on Thursday. Although neither of the central banks are set to change interest rates, the subsequent policy statements will be closely analysed to gauge the timing and scope of any changes over the coming months. These economic reports will be the key driver in the currency markets this week, culminating in the closely watched labour report on Friday.

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