LONDON Sterling hit a two-week high against the euro on Tuesday - the first day of London trading in 2017 - after a survey suggested British manufacturing growth climbed to a two-and-a-half-year high last month.
The monthly purchasing managers index (PMI) for the manufacturing sector rose to 56.1, the strongest reading since June 2014. That exceeded all forecasts in a Reuters poll, which pointed to a decline to 53.1, adding to signs the economy ended 2016 strongly.
The pound strengthened to 84.60 pence per euro after the data, its strongest since Dec. 22. That left it up 0.6 percent on the day, having traded at 85.01 pence before the results of the survey were released.
Against a broadly stronger dollar, sterling turned positive to trade as high as $1.2296, up from $1.2258 before the data. But that left it just 0.1 percent up on the day, and still close to a two-month low of $1.2201 hit last week.
The pound tumbled 16 percent against the dollar and 14 percent against the euro in 2016, its worst annual performance in eight years, with the bulk of those falls coming after Britain voted to leave the European Union on June 23.
Uncertainty over how Britain leaves the bloc and worries over the economic impact that will have are continuing to weigh on the currency and mean that even positive data surprises tend to have only limited - and temporary - impact on the pound.
"The market seems to be reacting quite sceptically to the strength of the data, possibly because it appears to be so at odds with the way the hard data for manufacturing have been coming in recently, which is soft and setting us up for a weak Q4," RBC Capital Markets currency strategist Adam Cole said.
"The main question for most economists is still the timing of the negative impact of the referendum outcome ... It's going to be hard for sterling to make a lot of traction on the back of economic data which is still lagging events."
Britain's blue-chip FTSE 100 index drifted down from record highs as sterling rose, but remained up 0.4 percent for the day.
PMI surveys for the construction industry and the dominant services sector are due on Wednesday and Thursday.
"With Brexit-related uncertainty likely to rise again with actual exit negotiations coming closer, we believe sterling upside should stay fairly limited," Credit Agricole analysts wrote in a research note.
(Additional reporting by Alistair Smout; Editing by Alison Williams)