Sterling jumped on Tuesday after a survey showed companies in Britain's dominant services sector grew more quickly than expected in May after a winter slump in early 2018.
But the mood concerning the pound's outlook remained more subdued due to uncertainty surrounding Britain's planned exit from the European Union in March 2019 and the Bank of England’s path for monetary tightening.
After slumping 3.43 percent against a resurgent dollar in May, sterling started June on the front foot, buoyed by data showing signs of a possible strengthening of the British economy after a sluggish first quarter.
The IHS Markit/CIPS services purchasing managers’ index (PMI) rose to a three-month high in May, better than forecast in a Reuters poll of economists.
That pushed sterling up to $1.3391 - close to a two-week high - before it tapered later in the session to $1.3339 as the dollar strengthened broadly. GBP=D3
Against the euro, the pound also rose to a four-day high of 87.25 pence. EURGBP=D3
Investors are now pricing in a roughly 40 percent chance of the BoE raising borrowing costs in August - the next time it updates its economic forecasts.
But analysts warned that risks around the sort of relationship Britain can agree with the EU after Brexit continue to cloud the currency’s outlook.