Sterling rose against the dollar and the euro on Monday after the British services sector expanded at its fastest pace in over six years in July and added to evidence that the UK economy is rebounding.
But the pound's gains are likely to be capped before Wednesday's Bank of England (BoE) Inflation Report, when the central bank could indicate that interest rates will stay at record lows for a prolonged period.
The pound rose to a session high of $1.5368 after the data was released, from $1.5322 beforehand, and up 0.44 percent. The euro fell to a session low of 86.44 pence after the survey was released from 86.75 pence beforehand.
The services sector purchasing managers' index (PMI) jumped to 60.2 in July from 56.9 in June, its highest level since December 2006 and a bigger gain than forecast by any of the economists polled by Reuters.
"Sterling cannot ignore that these numbers are very impressive," said Craig Erlam, analyst at Alpari. "But we think it will struggle to stay above $1.5350 because the focus will be on the inflation report and the forward guidance in that is likely to be bearish for the pound."
Growth in the dominant services sector came after Friday showed a strong rise in UK construction activity. All that added to analysts' view that the British economy had made a strong start to the third quarter after expanding in the second quarter.
But analysts said the pound was deriving little support from the improvement in data as short-term interest rates are being anchored by expectations that the BoE may commit on Wednesday to not raise its key policy rate at least until late 2015/2016.
Money market rates like overnight indexed swaps are pricing in the possibility of the first move in the bank rate in three years with a 25 basis point rate hike being fully factored in in four years' time. The bank rate is currently at 0.5 percent.
"The exact form of the forward rate commitment is highly uncertain with others speculating that it may commit to keep rates low until the unemployment rate reaches 7.0 percent, which is also not expected to occur until 2016," Bank of Tokyo Mitsubishi said in a note.
"If the BoE disappoints those expectations then there is scope for the pound to rebound in the near-term."
