LONDON, Feb 21 (Reuters) - The pound strengthened on Tuesday after data showed an unexpected bounce in British business activity, suggesting the economy could be sidestepping a deep recession.
The pound gained 0.4% against the dollar to $1.2088 and also firmed against the euro, with the European common currency dropping 0.72% to 88.17 pence, which would be its largest daily percentage fall in a month. .
The move followed the release of Britain's preliminary "flash" Purchasing Managers' Index, which jumped to 53.0 in February from 48.5 in January, above the 50 threshold for growth for the first time since July. It also beat all forecasts in a Reuters poll of more than 20 economists, which had pointed to a reading of 49.0.
"It’s another indicator that the UK economy is proving more resilient than people had feared at the end of last year, which is helping to support the pound in the short term," said MUFG senior currency analyst Lee Hardman.
"The question is whether this can be sustained as the British economy is still facing significant challenges."
An improving British economy drives a stronger pound on its own terms and because it makes the Bank of England more likely to continue increasing interest rates in an effort to bring inflation under control.
European activity data also came in better than expected, but Hardman said the pound's gains against the euro were partly because of pricing that reflected more pessimism for the British economy than the euro zone's.
Separate data released earlier in the day showed Britain's government ran an unexpected budget surplus in January.
Reporting by Alun John Editing by William Maclean and David Goodman