Sterling homed in on April's 26-year highs versus the broadly weakening dollar on Monday, moving above $2.01 with investors bolstered by prospects that the Bank of England will raise interest rates this week.
But sterling lost ground versus the euro, which was boosted after a stronger-than-expected survey on manufacturing that backed expectations for more eurozone monetary tightening. There was no discernible impact in the market from security alerts in Britain, where police arrested two more suspects in a hunt for members of a suspected al Qaeda cell which rammed a fuel-packed Jeep into a Scottish airport and left two car bombs in London.
British rate hike expectations got a sharp boost after BoE minutes from last month's rate meeting showed that four of its nine policymakers had voted for a rate rise, dissenting from June's on-hold decision.
Softer than expected data on Britain's manufacturing sector failed to dent those expectations. "It's likely that we could see a test of the 26-year highs over this week in the run up to the BoE meeting, even though the market is already positioned for a rate hike," said AIB Group Treasury economist Geraldine Concagh.
Sterling rose to a 2-1/2 month high of $2.0128, moving further toward April's 26-year peaks hit at $2.0133. It later trimmed those gains to stand at $2.0108 by 1412 GMT. The euro was up almost 0.4 percent on the day at 67.65 pence.
With British interest rates currently at 5.5 percent - the highest in the G7 - sterling has benefited from investors' penchant for carry trades, where they borrow cheaply using low-yielding currencies to buy higher return assets.
British data on growth, mortgage lending and consumer confidence last Friday, pointed to a reasonably buoyant economy, keeping intact expectations for a rate hike to 5.75 percent this week.
The market was also unfazed by data earlier on Monday showing British house price inflation eased in June, with signs that the booming London market may also be starting to cool in response to higher interest rates. Fifty-six of the 70 economists polled by Reuters after the last set of BOE minutes forecast a July rate hike to 5.75 percent with the rest choosing August.