LONDON: Sterling steadied against the dollar and edged closer to a 22-month high against the euro on Wednesday, but looked vulnerable to a pullback if UK construction data later in the session casts doubts over the health of the economy.
Construction PMI data for April, due at 0830 GMT, is expected to drop from the previous month to 54.0 but remain above the 50 level that divides contraction from expansion.
It comes after weaker-than-expected manufacturing data on Tuesday highlighted fragility in the economy and pushed sterling away from multi-month highs against a basket of currencies.
The pound was last close to flat on the day at $1.6221, within sight of an eight-month peak of $1.6304 hit on Monday. Trade-weighted sterling was at 83.4, close to this week's high of 83.6, the highest level since August 2009.
"If we get a weak PMI number then people will worry services sector numbers will be weak as well and that may lead to some profit-taking in sterling," said Paul Robson, currency strategist at RBS.
The dominant services sector PMI is due on Thursday, but Wednesday's construction PMI will also be watched closely given a slump in construction output was one reason behind the economy's contraction in the first quarter.
However, more upbeat business surveys have prompted economists and the Bank of England to voice doubts about the quality of the official data, particularly for construction.
Investors have largely shrugged off the drop in UK GDP as concerns about the euro zone debt crisis and speculation about more quantitative easing by the US Federal Reserve have fuelled demand for the pound.
Persistently high UK inflation has also supported sterling by prompting investors to pare back bets the Bank of England will loosen policy any further.
"The market is still embracing recent comments from BoE speakers who are worried about the stickiness of inflation," said RBS's Robson.
The euro fell 0.15 percent against sterling to 81.49 pence, near Monday's trough of 81.23 pence. Traders cited stop loss sell orders below 81.20 pence.
Citibank's CitiFX Wire reported selling by macro funds, but said some market players were cautious about trying to push the euro aggressively lower in the near-term.
"Even though traders have been calling for an eventual move towards 80.00 pence for the time being they prefer to stay on the sidelines and short around the 82.20 pence level," CitiFX Wire said in a note.