Sterling was gaining ground against the dollar and the euro after the latest UK retail sales and public finances figures came in stronger than expected.
The pound rose over a cent from intra-day lows against the dollar and climbed around half a percentage point against the euro. However, it is still struggling to maintain gains above EUR1.22, analysts said.
Duncan Higgins, senior analyst at Caxton FX, said: "There is clearly more confidence in the UK economy and following the figures the market may be pricing in a slimmer possibility of the Bank of England extending quantitative easing. Our short-term forecast remains for sterling to reach its June highs of EUR1.24."
The 1.1% rise in retail sales far exceeded the 0.4% rise pencilled in by economists, giving rise to hopes that the slowdown emerging in the wider economy has yet to hit the high street.
This marks the largest increase since February and is the latest in the line of upbeat figures since April. Additionally, non-food sales jumped by an even stronger 1.8%.
Phil McHugh, senior executive dealer at Currencies Direct, said: "With strong sales figures in both June and July this year, the impetus towards recovery is gaining momentum and lifting the pound. In addition we have had data from the Office for National Statistics that the PSNB (Public Sector Net Borrowing) has reduced by more than expected, providing another boost for the UK economy and the pound.
"The narrowing of the deficit will help the pound gain an edge in the markets as concerns over the deficit have been a major thorn in the side of sterling."
July's public borrowing figures coming in at £3.8 billion. This was well down on the £6.1 billion borrowed in July 2009 and brings this year's total to £44.9 billion.
Analysts today said that further cuts due to be outlined in the forthcoming spending review and the VAT rise to 20% in January should generate further revenue for the government.
John Hawksworth, chief economist at PricewaterhouseCoopers, said: "Today's public borrowing figures confirm that the public finances are on a gradually improving trend, with tax receipts rising at a reasonably healthy rate in the first four months of the year. Current spending is still on a rising trend but this is likely to moderate later in the year as the spending cuts introduced by the new government begin to take effect."
However, times could be much tougher ahead.
Vicky Redwood, senior UK economist at Capital Economics, said: "With bank lending still weak, and a huge fiscal squeeze still getting underway, we find it hard to see how consumers can remain so resilient. Even if consumer spending ends up supporting overall GDP growth in the third quarter, we expect both to weaken later this year."
