LONDON: Sterling rose to a one-month high against the euro on Tuesday after data showed the UK services sector expanding at its fastest pace in 16 years, pointing to solid economic growth in the final quarter this year.
The UK services purchasing managers' index (PMI) rose to 62.5 in October from 60.3 in September, beating economists' forecasts of 59.8 and increasing the chance that the Bank of England will revise up its quarterly growth forecasts next week.
Against sterling, the euro was down 0.7 percent at 84.03 pence, its lowest since Oct. 3.
The pound was up 0.5 percent at $1.6044, having hit a session-high of $1.6062, recovering smartly from a near three-week low of $1.5904 touched on Monday.
"Sterling will be fairly well supported now as the PMI figures were so strong and suggest that next week's BoE Inflation Report will be interesting. Chances are very high that they will revise up their growth forecasts and revise down unemployment forecasts," said Kathleen Brooks, research director at FOREX.com.
Brooks said the next key level would be the Oct. 31 high of $1.6070, beyond which sterling could test the $1.61 mark.
The BoE issues its quarterly Inflation Report next week and may also bring forward its forecast for when unemployment will hit the 7 percent level at which it will consider raising rates.
"Some MPC members have highlighted the recent progress of the labour market recovery and the risks that this poses to the bank's unemployment rate projections," said Valentin Marinov, head of European G10 FX strategy at Citi, in a note to clients.
"Indications next week that the MPC now sees stronger gains in employment before long could fuel expectations of earlier rate hikes and support sterling."
Analysts said the pound's rise was more pronounced against the euro than the dollar, before an European Central Bank meeting on Thursday where markets are pricing in a chance of a rate cut or more stimulus.
The euro tumbled from levels above 85.50 pence last week when weak euro zone inflation data sparked speculation the ECB may cut interest rates in order to stave off deflation risks.
The BoE also meets this Thursday but it is not expected to make any changes to policy.
Some strategists cautioned that hard data still indicated that it could be difficult for UK economic data to continue to beat elevated market expectations, leaving sterling vulnerable.
Data released by the British Retail Consortium earlier on Tuesday showed that retail sales strengthened slightly in October, but fell short of expectations.
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