Pound scales two-week high versus euro

LONDON (Reuters) - The pound strengthened against the dollar and euro on Tuesday, as dealers shrugged off yet more soft economic data and took advantage of the pound's slide to recent multi-year lows to buy it back at cheaper levels.

A string of weak manufacturing output, housing and retail sales data on Tuesday highlighted ongoing worries about the struggling economy but that wasn't enough to push sterling down any further.

Having fallen to a two-and-a-half year low against the dollar on Monday and a record low against the euro last week, sterling was poised for a rebound, albeit a potentially brief one.

"Many of the technical signals were that the pound was getting extremely oversold. It is not surprising against that backdrop to see cable recover," said Robert Minikin, currency strategist at Standard Chartered.

"There are risks of a short-term technical squeeze higher in sterling due to the fact that it has been so oversold," he said.

Sterling rose as high as $1.7668, before pulling back to $1.7601 by 3:37 p.m., up 0.1 percent on the day. The currency hit its lowest since April 2006 on Monday, at $1.7469.

The euro hit a two-week low against the pound of 80.05 pence and at 3:39 p.m. it was down 0.3 percent on the day at 80.08 pence.

But the underlying picture in the UK remains "exceptionally weak", and any rebound in the pound will be limited, Minikin said.

Data on Tuesday showed output in the UK manufacturing sector fell by more than expected in July, marking the fifth month in a row that production has fallen.