LONDON: 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 downbeat due to uncertainty surrounding Brexit and the Bank of England's path for monetary tightening.
After slumping 3.43 percent against a resurgent dollar in May, sterling has 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 against the dollar. It traded up half a percent on the day after the data at $1.3384 and was headed for its biggest daily rise in seven weeks.
Against the euro the pound also rose 0.4 percent to 87.43 pence.
Tuesday's business survey -- the third in as many days to show signs of renewed strength in the economy -- could increase the chances of a Bank of England interest rate hike later this year.
Investors are 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 it leaves the bloc early next year continue to cloud the currency's outlook.
"Brexit concerns and uncertainties still hang over these [rate hike] expectations and these concerns will only develop over the summer," said Hamish Muress, currency analyst at OFX.
Bad weather and slow growth saw markets in May drastically scale back expectations for monetary tightening.
On Monday BoE interest-rate setter Silvana Tenreyro said that much of the weakness in Britain's economy in early 2018 would probably prove temporary but that the timing of when rates would next go up was an open question.
"While I anticipate that a few rate rises will be needed, the timing of those rate rises is an open question," she said.
With time running out for Britain to secure a deal before exiting the European Union next March, diplomats are hoping an EU summit on June 28-29 could break the deadlock.
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