LONDON: Sterling rose against the dollar on Thursday after data showed that Britain's service sector posted robust growth in September, a further indication of a sustained economic recovery.
While the headline Markit/CIPS Purchasing Managers' Index (PMI) for services eased to 60.3 from August's 60.5, it beat the Reuters' consensus of 60.0 and rounded off the sector's strongest quarter in more than 16 years.
The pound was up 0.1 percent at $1.6231, from $1.6194 before the data. It edged closer to the nine-month peak of $1.6260 reached on Tuesday, which was acting as near-term resistance.
Overall, sentiment towards the pound has considerably improved in the past two months. UK data releases have been positive, contributing to bets that Britain's central bank may hike interest rates much sooner than it has flagged.
Sterling overnight interbank average rates (SONIA) are pricing in a strong chance of a rate hike within two years, which is before the BoE's 2016 timeframe.
The dollar suffered broad-based weakness after a partial US government shutdown raised bets that the Federal Reserve might delay trimming its stimulus.
"The strong PMI print helped sterling," said Ian Stannard, head of European FX strategy at Morgan Stanley. "The important driver, however, still comes from the US as markets are now likely to factor in a possibility that Fed tapering may be delayed even further if the government shutdown continues."
"That will see dollar soften and provide an overall environment for sterling to push a little bit higher in the near term. I wouldn't be surprised if sterling crossed $1.6260 to target the year's high of $1.6380."
Against sterling, the euro was up 0.2 percent at 83.87 pence, pulling the pound away from an 8-1/2 month high of 83.325 pence per euro, struck on Tuesday.
Traders said the euro had strong chart support at 83.33 pence, equating to 1.20 euros per pound, a level at which UK companies often look to buy the euro for hedging purposes.
The euro was supported after PMI data pointed to a recovery in the euro zone services sector.
The euro also gained broadly after a resolution to the political situation in Italy and as European Central Bank chief Mario Draghi kept the door open to pumping more ultra-cheap loans to banks, but stopped short of any immediate action.
Draghi added that while the central bank was paying close attention to the strengthening euro, the exchange rate "is not a policy target for the ECB."
"People were a little bit surprised at how hawkish the ECB press conference was. Also people would have been thinking that euro/dollar into the mid 1.30s might have drawn a comment from Draghi," said Paul Robson, currency strategist at RBS.
"The fact that it didn't, coupled with developments in Italian politics encouraged people to buy the euro".
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