By Elizabeth Howcroft

LONDON (Reuters) -Sterling fell on Thursday, erasing the week’s gains against the dollar, as investors weighed up the outlook for an economic recovery in Britain.

After a short squeeze at the start of April, the pound has strengthened against the dollar in the last couple of weeks – a move that Kenneth Broux, FX strategist at Societe Generale, said was driven by U.S. Treasury yields coming down from their recent highs and prompting the dollar to weaken.

“If U.S. 10-year yields were to test and break 1.50%, that would be bullish for the pound, certainly against the dollar,” Broux said.

“I think the macro economic data (in Britain) is brightening, we’ve seen that in the economic numbers this week … we also have strong consumption.

“The only question really for the pound is how much is priced in, in terms of the economy. We know Q2 will be strong-ish but we don’t know how strong it is and what is priced in.”

British manufacturers’ expectations of an economic rebound rose to their highest since 1973 this month as the country began to recover from the slump caused by the COVID-19 pandemic, the Confederation of British Industry said.

But the pound fell during the European session, in a move which analysts said lacked a clear fundamental driver.

At 1533 GMT, the pound was at $1.3844 versus the dollar, down 0.6% on the day. Versus the euro, it was down around 0.5% at 86.85 pence per euro.

“There’s still a lot of speculation out there of how aggressive the rebound in consumption is, what the drawdown in household savings is, all these kind of things, once the service sector reopens, and this uncertainty is just leaving sterling trading between that $1.38-$1.40 range,” said Simon Harvey, senior FX market analyst at Monex Europe.

“We saw big gains at the beginning at the week and now we’re seeing a reversion of this.”

Earlier this week, sterling hit a six-week high against the dollar after Britain’s unemployment rate unexpectedly fell for a second month in a row in the December to February period, most of which the country spent under a tight COVID-19 lockdown.

UK retail sales data is due on Friday, along with flash PMIs – which Societe Generale’s Broux said he expected to be “very, very strong” in services.

Non-essential shops in England and Wales re-opened on April 12, as part of a plan to ease the COVID-19 restrictions. The number of people going to shops in Britain jumped 87.8% last week, data on Monday showed.

(Reporting by Elizabeth Howcroft; Editing by Larry King, Gareth Jones and Alex Richardson)