Sterling set for strongest monthly performance against dollar since November 2023

By Lucy Raitano

London (Reuters) -Sterling fell against a firmer dollar on Wednesday but stayed close to a three-year high and is on track for its strongest monthly performance since November 2023, as markets stay focused on looming key U.S. economic data.

At 1046 GMT, the pound was down 0.28% versus the dollar to 1.3368, and fell 0.2% versus the euro to 85.08.

The dollar held firm on Wednesday amid more signs of an easing in trade tensions as U.S. President Donald Trump relaxed tariffs on the auto sector.

Uncertainty continues to reign over markets, however, as companies worry about how to deal with the hefty tariffs, leading to ongoing vulnerability in the U.S. dollar which is on track for its weakest monthly performance since November 2022.

Safe-haven currencies like the euro, Swiss franc and yen have fared better. The pound is also up 3.8% versus the dollar this month, and has even outperformed the euro, rising 1.7% against the common currency in April.

Francesco Pesole, FX strategist at ING, highlighted potential diversification in the European FX space as a potential reason for sterling's strong performance against the euro.

"We saw the euro being the biggest beneficiary of dollar outflows, but I think the past few days have seen a realisation that the euro zone macro and rates situation is not that appealing," he said.

Meanwhile, Britain is aiming to soften the blow of U.S. tariffs by reaching an economic agreement with the Trump administration that could foster more tech investment, while working to remove post-Brexit trade barriers with the EU.

"The tariffs are the worst case scenario for the pound," said Michael Pfister, FX analyst at Commerzbank, pointing to the country's trade deficit with the U.S.

Elsewhere, data on Wednesday from mortgage lender Nationwide showed British house prices fell by 0.6% in April, a sharper fall than forecast and their biggest monthly decline in more than 18 months.

(Reporting by Lucy Raitano in London; editing by Ed Osmond)