Sterling rose against the dollar on Monday, tracking a move up in the euro versus the dollar and helped by market speculation that UK services data may be stronger than forecast.
But some analysts warned that even a better-than-expected services PMI reading was unlikely to change the overall gloomy outlook on the UK economy and market players could use any strength in the pound as an opportunity to sell.
Developments in the euro zone debt crisis are still seen as an important driver of sterling and Italy's announcement of austerity measures helped support demand for perceived riskier currencies in early European trade.
But many traders were wary of selling the safe haven dollar too aggressively ahead of a crucial week of talks among euro zone policymakers.
Sterling was last up 0.4 percent against the dollar at $1.5648, with traders citing buying by Middle East investors.
Technical strategists said a failure to rally much beyond $1.57 had weighed on the pound in recent days, but strong downside support came in around the Nov. 25 low of $1.5423.
"Looking at market expectations for PMI readings only the UK and the U.S. are expected to come in above the 50 level," said Jane Foley, senior currency strategist at Rabobank.
Foley said she expected sterling to underperform the dollar as long as the euro zone crisis dragged on and curb investor appetite to take on risk, but hold up against the euro.
"In isolation sterling fundamentals look terrible but there is no crisis here and at least there is an austerity plan in place," she added.
November PMI data for the dominant UK services sector, due at 0928 GMT, is forecast to decline to 50.5, down from 51.3 in October.
Some market players said there was speculation the number would beat that forecast but the reading was still likely to be perilously close to the 50 level that divides expansion from contraction, and show a slowdown from October.
Manufacturing PMI data released last week showed the manufacturing sector shrank at its fastest pace sine June 2009, while construction activity expanded at a slower pace than the previous month.
"Sterling has looked vulnerable as sentiment towards UK growth continues to soften following some weak PMI releases," said Lloyds strategists in a note.
"Today's services PMI will be important release given services accounts for 76 percent of GDP. A further decline is expected and will likely put downward pressure on GBP."
The euro was trading almost flat against the pound at 85.88 pence. Upside resistance is seen around 86.10-20 pence, a level that has capped euro gains since Nov. 23.
read more: Olympus Wealth Management
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