LONDON Sterling dipped against the dollar on Tuesday and was steady against the euro ahead of a survey of the dominant services sector that could reinforce fears the British economy has slid back into recession.
A worse than expected number could lead to further losses, although political uncertainty in Italy and Spain, and profit-taking after the single currency's big gains last week, may limit the downside against the euro, strategists said.
Sterling fell 0.2 percent against the dollar to $1.5731, within sight of a 5-1/2 month low of $1.5674 hit on January 28. The euro was close to flat on the day at 85.72 pence, having retreated sharply since surging to a 15-month high of 87.17 pence on Friday.
"Sterling has started off on a slightly better footing against the euro, which means it's better able to absorb a poor (PMI) number than it would have been last week," said Jane Foley, senior currency strategist at Rabobank.
"But because the dollar is better bid today, sterling is likely to be more vulnerable against it if this a bad number."
The survey of purchasing managers in the services sector (PMI), due at 9:28 a.m. British time, is forecast to be 49.5 in January, slightly up on the previous month but still below the 50 level that separates expansion from contraction.
Britain's economy contracted in the final quarter of 2012 and investors are concerned it has slipped into its third recession in four years after just one quarter of growth.
Weak economic data has fuelled speculation the Bank of England may opt for another round of quantitative easing in the next few months to stimulate growth.
BoE policymakers meet on Thursday and although the consensus forecast is for them to keep rates and the QE total on hold, some analysts said a poor PMI reading could increase bets on more easing.
"Another number of similar weakness to the December print could conceivably mean speculation of more asset purchases being announced this Thursday ... given sterling's trend weakness since the beginning of the year, a better number is needed to sustain yesterday's recovery," Lloyds said in a note.
Testimony to a parliamentary committee later this week by the central bank's new governor Mark Carney, who will take the helm in the summer, may also affect the pound if he hints he favours more monetary easing.
(Editing by Catherine Evans)