LONDON Dec 12 Sterling rose on Thursday as investors took heart from recent positive data including upbeat forecasts from a business group, reinforcing the view that Britain's recovery is taking hold ahead of key numbers next week.
Recovering from Wednesday's falls, the pound rose 0.3 percent against the dollar in thin volumes to $1.6414, edging back towards the two-year high of $1.6468 it hit earlier this week.
The euro was 0.3 percent lower against the pound at 83.95 pence, having hit a three-week high against sterling on Wednesday.
Sterling has been one of the currency market's surprise packages in the second half of this year, rising strongly since the summer as strong economic data has added weight to the view that UK interest rates may rise earlier than previously thought.
The British Chambers of Commerce said on Thursday that Britain's economy will expand at its fastest rate in seven years in 2014, thanks to strengthening household consumption.
Sterling was also supported on Thursday as the spread of two-year gilts over two-year Treasuries widened, improving the rate differentials in its favour.
But the pound faces key tests to its strength next week in the form of inflation and unemployment data and minutes from the Bank of England's December meeting.
"At the moment the market likes to trade a good UK figure," said Lee McDarby, executive director, corporate FX sales at Nomura International.
"If the UK recovery seems to remain on course when next week's economic figures are released then the pound should do well, especially with markets getting thinner and more illiquid as we reach year end."
Trading volumes against both the dollar and the euro were below average levels recorded over the past month, according to data from the Reuters dealing platform, meaning price moves may be exaggerated.
Recent data has showed slightly stronger than forecast industrial output, while the National Institute of Economic and Social Research said on Tuesday that growth was picking up. Britain's economy grew an estimated 0.8 percent in the three months to the end of November, up from 0.7 percent in the three months to October.
"Looking at relative growth forecasts, that's going to be supportive for sterling going forward," said Ian Stannard, head of European currency strategy at Morgan Stanley.
But he added that he is more cautious on the pound over the longer-term. "We're exiting recession with an already-wide (trade) deficit," Stannard said. "That could be something that comes back to haunt sterling."