Sterling helped by better-than-expected UK services data

LONDON: Sterling rose on Wednesday, bolstered by better-than-expected UK services sector activity in May which kept alive expectations of monetary tightening by the Bank of England early next year.

The pound climbed to $1.6743 after the data from around $1.6705 beforehand, and down only 0.1 percent on the day. It had fallen to a low of $1.6699 earlier in the European session.

The euro lost ground, hitting a low of 81.315 pence after the survey was released, from around 81.48 pence beforehand.

Gilt futures edged down to a session low after the services sector data.

The Markit/CIPS services purchasing managers' index (PMI) ticked down to 58.6 in May from 58.7 in April. But it was better than a Reuters poll which had forecast a reading of 58.2 in May and still well above the 50 mark that denotes growth.

"The PMI reading was better than expected and that has helped sterling," said Manuel Oliveri, FX strategist at Credit Agricole.

"But with the dollar recovering broadly, we think the pound's gains in the short term against the dollar will be capped. Against the euro though, diverging monetary policy outlooks will drive the pair."

Longer U.S. Treasury yields have risen 20 basis points in the past week and added around another five in U.S. trade, prodding the dollar higher broadly.

But the UK services sector data brought the focus back to Britain's economic recovery. The UK economy posted its fastest annual growth in more than six years in the first quarter and is expected to grow about 3 percent in 2014, outpacing other big, industrialized nations.

As a result, financial markets expect the Bank of England to begin raising rates early next year, in stark contrast to the European Central Bank which will still be in easing mode, and probably at least a few months ahead of the Federal Reserve.

Sterling had run up to a 5-1/2 year peak against the dollar earlier in May. Over the last year the pound has appreciated some 10 percent against a basket of currencies on the growing assumption that the improving economy and red-hot housing market will force the BoE to raise rates faster than its major peers.

"Robust data has allowed the pound to weather position adjustment in May with relatively little damage, and with long positioning now cut back we see scope for renewed outperformance," BNP Paribas said in a note.

"We remain short euro/sterling accordingly."

The ECB is widely expected to ease policy on Thursday, a move which should weigh on the euro. ECB sources told Reuters last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.