LONDON Sterling hit two-and-a-half month highs against the dollar and a trade-weighted basket of currencies on Monday as investors cut bets on more monetary easing after data showed above-forecast British first-quarter growth last week.
Better British data contrasted with below-forecast first-quarter gross domestic product in the United States on Friday and with growing expectations that the European Central Bank will cut interest rates later this week.
The pound could get a further boost this week if British purchasing managers' surveys (PMIs) on Wednesday, Thursday and Friday show economic activity continued to improve in April.
"Both internal and external factors are pointing the compass north for sterling. If we get expansion in services PMI on Friday and we get a disappointing U.S. payrolls figure then we could see sterling close to $1.57," said Nawaz Ali, market analyst at Western Union Business Solutions.
Figures last week showed Britain comfortably evaded recession by growing 0.3 percent in the first quarter, much more than the 0.1 percent rise expected.
The pound rose 0.4 percent on the day to hit $1.5547, its strongest since mid-February, with traders reporting that a Middle East buyer was propping it up. But they said offers around $1.5550, where an options barrier was reported, could limit its rise.
Beyond there, the pound's next target was chart resistance at $1.5574, its 100-day moving average.
Against a trade-weighted basket of currencies the pound rose to 81.3, its strongest since February 8, Bank of England (BoE) data showed.
More gains against the dollar could come when the U.S. Federal Reserve makes an announcement on monetary policy on Wednesday. Below-forecast U.S. GDP data and recent weak jobs data are likely to make policymakers wary of announcing any tapering of its asset-buying programme just yet.
The euro was steady at 84.19 pence, having hit a three-month low of 83.98 pence on Friday.
The pound's gains were expected to be limited, however, on concerns Britain's recovery was still fragile and the possibility that incoming BoE governor Mark Carney may advocate further monetary easing when he takes up his position in July.
Analysts at Morgan Stanley said they would use rebounds into the $1.5550 area to reestablish bearish positions.
"Fiscal consolidation in the UK continues to skew growth risks to the downside. Moreover, recovering bond markets in the euro zone should result in less demand for UK government securities," they said in a note to clients.
BoE policymaker Ian McCafferty was reported on Monday as saying he was "cautiously optimistic" about Britain's economy but that he expected its recovery to be slow and difficult.
(Editing by Pravin Char)