File picture: Reuters

London - Sterling gained on Friday after data pointed to robust growth of the construction sector, although other figures on house prices and weak business lending underlined the risks inherent to Britain's economic recovery.

The pound was up 0.3 percent against the euro to trade at 82.90 pence, as a broadly weak euro retraced some of gains it has made over the year-end due to European banks repatriating funds ahead of an asset quality review.

Sterling also gained 0.1 percent against the dollar to trade at $1.6468 at 13:10 SA time after the PMI survey of construction sector purchasing managers came in just below the previous month's six-year high.

December saw the biggest increase in commercial construction since 2007 and confirmed that housing remains the fastest growing area of construction.

But while home price figures from lender Nationwide also highlighted that sector's recovery, they mainly added to the feeling such gains are not sustainable and may provoke action from the Bank of England to cool the market.

“It's a very mixed bag,” Peter Frank, global head of G10 FX at BBVA said. “On the construction side, PMI held up well, that's probably the main reason for the slight rally in sterling-dollar.”

“The other sets of data, a little bit confusing. Not surprising, but a little bit confusing.”

The average British house now costs 8.4 percent more than a year ago, stoking concerns that a government scheme to encourage buying has stoked inflation rather than encouraged construction.

The Bank of England's own figures on Friday showing mortgage approvals hitting a five-year high.

But the same data set indicated that business lending has decreased by the biggest amount since the data series started in April 2011, pointing to a recovery that is still driven by consumption rather than investment.

Overall, Friday's data showed a continuing recovery and growing risks of an overheating housing sector, both of which have provided support to the pound.

A strong British recovery, hinted at by the strong construction and mortgage readings, is good for the pound.

The Bank of England maintains that while it recognises inflation-related concerns, the recovery remains too fragile and uneven to risk a rise in interest rates. It has not ruled out using less blunt policy instruments to cool down the housing market or to weaken the pound, which it fears may weigh on the recovery if it appreciates too rapidly. - Reuters