Updates with monthly PMI data

By Amanda Cooper

LONDON, Feb 21 (Reuters) - The pound traded around two month-highs on Friday after data showed UK consumer spending picked up much more sharply than expected in January, while a separate survey of business activity showed British companies are rapidly cutting staff.

Finance minister Rachel Reeves, as part of her budget in late October, raised taxes on employers, which has prompted businesses to dramatically scale back their hiring plans.

The preliminary reading of the UK S&P Composite Purchasing Managers' Index $(PMI.UK)$ for February dipped marginally to 50.5 from 50.6 in January, remaining just above the 50 level that separates growth and contraction.

But there was a sharper fall in employment which sank to 43.5 from 45.3, its lowest since November 2020 or since the 2007-08 financial crisis excluding the COVID pandemic period.

Sterling GBP=D3 was last up 0.1% on the day at $1.2675, around its highest in two months, having traded at $1.266 prior to the figures.

The euro EURGBP=D3 was last down 0.1% against the pound at 82.81 pence, from 82.85 before the data.

Wage growth in the UK remains strong, with regular pay rising at a rate of 5.9% in January, based on data earlier this week. Consumer inflation hit a 10-month high of 3% last month, while economic growth has been stronger than expected, but still fairly middling, at just 0.1% in the final quarter of 2024.

The prospect of an economy that is barely growing and sticky inflationary pressures has prompted traders to price in no more than two more rate cuts this year from the Bank of England.

The pound has been grinding higher since the start of the year, up 1.2%, ranking it towards the bottom of the G10 pack, following its performance as the biggest gainer among major currencies against the dollar in 2024.

"We would not be jumping on sterling longs given the current

stretched levels and the appreciation recorded since mid-January," strategists at BBVA said in a note.

A separate data release earlier on Friday showed British retail sales rose by 1.7% in January, according to the Office for National Statistics, above forecasts for a rise of 0.3%.

December's figure was revised down to show a monthly drop of 0.6%, from an initial reading of a 0.3% decline.

(Reporting by Amanda Cooper; Editing by Harry Robertson and Toby Chopra)

((amanda.cooper@thomsonreuters.com; +442031978531; Bluesky: @acoops.bsky.social;))