Sterling recovered from Monday's seven-month low versus the euro on Tuesday and gained versus the dollar, supported by weaker than expected German sentiment data and recent falls UK interest rate futures.
In Germany, the eurozone's biggest economy, the closely-watched ZEW sentiment gauge fell unexpectedly in March to 63.4 from 69.8, pressuring the euro against most major currencies.
In addition, some analysts said that a recent fall in short sterling contracts erasing the likelihood of an interest rate cut this year was now filtering through to the foreign exchange market, giving some limited support to the British currency.
"On the interest rate side we've had some significant declines in short sterling futures just recently as the market is starting more to price in the next move in rates being a hike," said Steve Barrow, currency strategist at Bear Stearns. "We think rates will still be cut, but nevertheless that's the way the market has been moving and perhaps that has helped sterling to recover a little bit of ground."
By 1510 GMT sterling was 0.5 percent firmer versus the dollar at $1.7426 after weak US economic data, up from a two-month low of $1.7228 hit on Friday.
Versus the euro it was around a third of a percent stronger at 68.82 pence, having recovered from Monday's 69.28 level - its lowest since last August. "Within Europe, we generally see the euro slightly softer and I think that's a hangover from the ZEW survey," Barrow said.
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