UK manufacturers saw confidence levels reach a 30-month high as output and new orders strengthened, according to a closely watched indicator.

The manufacturing purchasing managers’ index (PMI) rose to 56.1 in December, up from 53.6 in November, as the sector ended the year on a high note according to data compiled by IHS Markit.

The pound rose sharply against the euro on Tuesday morning as the data was released, reaching highs of €1.1822. The pound also rose against the dollar, regaining all losses in Tuesday morning trading.

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The PMI reading means UK manufacturing confidence remains well above the long-run average of 51.5. Any reading above 50 indicates net positive sentiment.

Production and new order growth reached their respective high points for two and a half years as demand from the UK and abroad both increased.

Manufacturers’ morale was severely hit by the June vote to leave the European Union, but has since increased as predictions of short-term economic chaos were not proven accurate.

However, consumer inflation is expected to rise sharply this year, as devalued sterling feeds through on higher input costs. The producer price index, which measures factory gate prices, rose by 2.3 per cent in November, which will almost certainly feed through to consumer prices.

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Howard Archer, chief UK and Europe economist for IHS Global Insight, said: “While strong orders growth in December suggests that manufacturing activity should be decent at the start of 2017, there are significant dangers for the sector that look likely to build up as the year progresses.”

The threat of inflation outstripping wage growth may also weigh on consumer purchasing power as prices rise.

Mike Rigby, head of manufacturing at Barclays said: “As resilient as the sector has proved to be over the years, weaker sterling is making imports more expensive, feeding inflationary pressures which will inevitably impact domestic output.

“To keep the momentum going, what we need to see now is manufacturers realising more of the investment decisions that were put on hold in 2016,” he added.