Sterling rose half a percent to five-day highs against the euro on Tuesday after weak German data hurt eurozone rate rise expectations. Investor sentiment in Germany plunged in August to its lowest level in more than five years, according to the latest survey by the ZEW economic research institute.
Sterling was trading at three-week lows against the euro ahead of the German data, as recent weak UK data has dented talk of higher UK interest rates from the current 4.75 percent, following a surprise hike earlier this month.
The European Central Bank is expected to raise interest rates at least once more this year from the current 3 percent, with the next move seen in October.
"The euro has fallen against sterling because the ZEW came in so much weaker than expected," said Adarsh Sinha, currency strategist at Barclays Capital.
"There are questions about a 25 basis point ECB rise in October."
By 1345 GMT, sterling was up half a percent on the day against the euro at the highs of 67.75 pence. Sterling hit 2006 highs of 67.20 pence shortly after the UK rate rise earlier this month, but has since weakened by more than 1.5 percent to the three-week lows set earlier on Tuesday.
The pound was down nearly a quarter percent on the day at $1.8896.
Sterling hit five-day highs against its trade-weighted index at 102.6.
There was little domestic data on Tuesday. The Industrial Relations Services (IRS) said median British pay rises were steady in the three months to July at 3.0 percent.
The Confederation of British Industry industrial trends survey for August is due on Wednesday at 1000 GMT, forecast to give a reading of -12.0, from -11.0 in July.