LONDON: Sterling hit a three-week high against the struggling euro on Wednesday, after a survey showed Britain's dominant services sector growing at a much faster than expected pace in November.
But it failed to get much traction against the dollar ahead of finance minister George Osborne's half-yearly budget update. Osborne will try to convince investors that his plan for more spending cuts are more credible than the opposition Labour Party's less aggressive austerity proposals.
Analysts say that while the British economy has performed well in the past couple of years, public finances have not improved at the same pace and so borrowings are higher than last year. "The Chancellor will have to substantially revise up borrowing projections for this year and for coming years.
For the currency, it will signal further softness ahead as it will limit the scope for the Bank of England to raise rates anytime soon as fiscal policy remains comparatively tight," FXPro chief economist, Simon Smith, said.
Sterling was steady at $1.5645, not far from Monday's low of $1.5585 - the pound's weakest since early September 2013.
It rose to $1.5671 after the UK services sector survey was released, before giving up some of those gains.
The pound rose 0.5 percent against the euro, with the single currency down at 78.71 pence - its lowest since Nov. 12.
The euro was under pressure ahead of an European Central Bank meeting on Thursday. Policymakers in the euro zone are grappling with declining inflation expectations which are likely to prompt them to ease policy sooner rather than later.
Back in Britain, investors drew comfort from the services sector purchasing managers' index, which highlighted the contrasting prospects for Britain and the euro zone economies.
The closely watched Markit/CIPS services purchasing managers' index (PMI) rose to 58.6 in November after falling sharply to 56.2 in October, beating forecasts in a Reuters poll, amid reports of firm demand and increased new business.
The services industry makes up almost 80 percent of the UK economy and its health is therefore an important consideration for the Bank of England when deciding when to raise rates.
UK rate forecasts have been pushed back dramatically over the past few months, with some now not expecting a hike until 2016.
That pushback of expectations has weighed on the pound, sending it down almost 9 percent since it hit a six-year high near $1.72 in July when many had expected a hike this year.
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