Sterling climbed against the dollar and hit a two-month high on a trade-weighted basis on Wednesday after data unexpectedly showed activity in the UK's dominant services sector grew at its fastest pace in four months. But analysts said the gains could run out of steam as concerns remain about the fragility of the UK economic recovery, particularly after data earlier this week showed manufacturing activity contracting.
The Markit/CIPS services purchasing mangers' index rose to 55.4 in July from 53.9 in June, confounding forecasts of a slowdown to 53.2 and raising hopes growth may pick up as services make up around 70 percent of the UK economy. "One services PMI is not enough to change the sentiment that a second round of quantitative easing (by the Bank of England) may be necessary in the UK," said Chris Turner, head of FX strategy at ING.
Sterling was last up 0.6 percent against the dollar at $1.6380, holding near its session high and in sight of the two-month high of $1.6477 hit earlier this week. Its gains helped lift the pound's trade-weighted index to 79.8, its strongest since June 1.
The euro traded at 87.27 pence against sterling, up 0.2 percent on the day but not far from a two-month low of 86.955 pence hit earlier in the session. Traders said strong demand from UK importers to buy euros above 1.15 per pound - roughly around the day's high - capped the pound's gains and pushed it off its highs.
Sterling also posted strong gains against the franc, rising 2.3 percent on the day to 1.2731, well above a record low hit on Tuesday around 1.2395 francs. It last traded up 0.7 percent on the day at 1.2539. The euro also gained across the board, although it remains vulnerable to concerns that the eurozone debt crisis is spreading to larger economies such as Spain and Italy.