The pound touched a three-month high as the dollar weakened and UK manufacturing data showed the sector held up in December.
Sterling extended early gains to rise as much as 0.5% as manufacturing activity continued to expand, although at a slightly slower pace than the prior month.
The pound has also benefited in recent weeks from a falling dollar, ending 2017 up almost 10% versus the greenback.
"With the dollar on the defensive it looks likely that we are set to test 1.3596,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. While the manufacturing PMI is weaker than the prior month’s, "the readings remain broadly elevated," he said.
The pound gained 0.3% to $1.3547 by 10:23am in London, after earlier touching $1.3567. It slipped 0.2% to 89.04 pence per euro. The yield on UK 10-year government bonds gained six basis points to 1.25%.
Until parliament returns next week and the focus switches back to Brexit, sterling traders will be awaiting the next gauge of the health of the economy from construction and services data due on Wednesday and on Thursday.
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