LONDON Sterling surged by 1 percent on Tuesday to trade above $1.34 for the first time since mid-July, after U.S. data disappointed and the view spread that Britain will - for now - manage to dodge a much-feared recession following its vote to leave the EU.
A run of upbeat data has shown the economy holding up relatively well in the months following the June 23 referendum on the UK's membership of the European Union, such as Monday's purchasing managers' index survey of Britain's huge services sector.
With North American markets closed for the Labor Day holiday on Monday, Tuesday was the first time for U.S. traders to react to the survey, which saw the biggest one-month gain in its 20-year history, beating all forecasts in a Reuters poll.
Morgan Stanley economists also raised their growth forecasts for Britain on Monday and adjusted their Bank of England easing view, delaying their call on the next tranche of quantitative easing, or QE - creating new money to purchase assets - to February 2017.
Sterling rose by more than 1 percent to hit a seven-week high of $1.3444 after data showed the U.S. economy's service sector expanded in August but at a slower pace than in July, and the fall from the previous month was the largest since the 2008 financial crisis.
"The market is shifting away from upbeat U.S economic and away from downbeat UK economic expectations," said Mizuho's head of hedge fund currency sales Neil Jones.
"On the political front, the latest polls suggest the U.S. election maybe tighter than previously expected, generating uncertainty for the dollar," he added. "Market participants are cutting back on short sterling and long dollar."
Speculators trimmed record high bets against the pound in the week ending Aug. 30, and analysts said if investors roll back expectations of further monetary easing in coming months, sterling could advance further.
The Bank of England cut rates to near zero early last month and launched a QE programme to cushion the economy from the shock referendum result.
"Sterling may squeeze up a bit more but many investors will see this a chance to sell. It would be a surprise if it managed to get through $1.35 before falling again," said James Binny, EMEA Head of Currency at State Street Global Advisors.
"Sterling is seen as slightly cheap on long-term valuation type measures, but it will be a while until that feeds through to allow it to rise again and is unlikely to happen this year."
The pound also hit a five-week peak against the euro of 83.335 pence.
(Additional reporting by Patrick Graham; Editing by Hugh Lawson)