The sterling extended gains on Thursday, building on the one-month high it reached against the euro in the previous session, as data this week reduced market expectations of a central bank rate cut as early as next week.

Money-market pricing suggests investors now see around a 50% chance of a quarter-point rate cut at next week's Bank of England policy meeting, down from 70% on Monday, Refinitiv data showed.

"We have had some decent data this week that has pointed to a pick-up in economic sentiment, and that is helping the pound," said Lee Hardman, a currency strategist at MUFG in London.

Versus the euro, the pound was last up 0.2% at 84.27 pence, after rising to a more than one-month high of 84.18 pence. Against the dollar, however, the pound was on the back foot at just above $1.31.

Data this week showed the Confederation of British Industry reporting a pick-up in manufacturers' sentiment, while jobs data on Tuesday showed the British economy created jobs at its strongest rate in nearly a year in the three months to November.

The focus now is Friday's January purchasing managers' index, widely viewed as a forward-looking indicator that could swing the rate debate one way or another.

Broader market positioning has also become favourable towards the pound's outlook. Latest data showed hedge funds ramped up their long positions on the pound to their highest in more than 1-1/2 years.