Sterling hit a six-month high against a broadly weaker dollar on Tuesday, lifted by expectations the UK will continue to recover after recent upbeat economic data and robust bank earnings. The pound also benefited from across-the-board weakening of the US dollar on concerns about a slowing US economy and speculation of further monetary easing by the US Federal Reserve.
The pound rose to as high as $1.5968, its highest since early February, stopping just short of $1.5970, the 61.8 percent retracement of its move down from a high in August 2009 of $1.7044 to May's low of $1.4225. By 1527 GMT, the pound was 0.3 percent higher on the day at $1.5939.
The euro was steady at 82.95 pence, after hitting a one-month high of 82.54 pence the previous day. Offers were seen around 83.20 pence, traders said. Trade-weighted sterling matched Monday's 11-month high of 82.7. The pound has been in demand due to recent strong UK data, including forecast-busting second quarter economic growth, while a manufacturing activity survey on Monday came in above expectations.
Evidence of a healthy banking sector has also buoyed the UK currency because of the financial sector's hefty contribution to the UK economy, with banking giant HSBC reporting strong earnings on Monday. Sterling's rally on Tuesday was checked a little, however, after a UK construction purchasing managers' index fell to a four-month low of 54.1 in July, from 58.4 the previous month.
Market players awaited a UK services PMI survey on Wednesday, which is expected to hold steady at 54.4, staying above the 50 level which marks growth in activity. "We may continue to see above-trend UK growth in the third quarter, creating a supportive dynamic for the pound," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. "However, the trade could become stretched if we see a significant rise above $1.60, so we would expect some consolidation."
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