This could be the best way to play the UK recovery
Amid growing signs that a recovery in the U.K. economy is gaining momentum, one currency strategist says the best way to position for the rebound is to sell the euro against sterling.
Data on Thursday showed the U.K. manufacturing sector in June grew at its fastest rate for more than two years and Adam Cole, head of currency strategy at RBC, said the activity data followed a consistent theme where depressed expectations were not hard to beat.
(Read more: Investors 'Washed Out' as Sterling Hits 3-Year Low)
"For this reason, the underperformance of sterling, that you have seen over the last month is something to be bought into, selling euro/sterling in particular is a trade that we like at these levels," said Cole.
The euro was trading at about £0.8685 on Thursday, down almost 0.7 percent on the day, but still up about 1.6 percent from where it traded a month ago.
The Markit/CIPS Manufacturing Purchasing Managers Index (PMI) jumped to 54.6 in July from an upwardly revised 52.9 in June. Manufacturing production increased for the fourth month running, as growth of new orders continued to strengthen.
(Read more: Forward guidance? Sterling could be about to fall)
The pound posted a modest gain against the euro and the dollar as U.K. manufacturing climbed by more than expected and as the Bank of England left interest rates on hold on Thursday.
"The U.K. economy is not growing strongly, but the question is how strong is it growing relative to expectations, and in my view expectations for the U.K .are so depressed, that delivering upside surprises is now a relatively easy task, which sets up the positive background for sterling, not that the economy is outright strong," said Cole.
Cole recommended playing sterling against the euro instead of against the dollar.
"Cable (sterling/dollar) is very much a dollar story rather than a sterling story and the cleaner expression of sterling is through the crosses, when we are in markets generally that are so dominated by Fed expectations and the way that drives the dollar broadly," he said.
Tom Levinson, currency strategist at ING Financial Markets said there was a risk of sterling moving lower after the Bank of England issued no statement after its meeting and left rates at a record low of 0.5 percent.
"The risk is that sterling moves lower both on the sterling story and on a dovish European Central Bank (ECB)," said Levinson, adding that euro strength has been a theme for a number of years now.
"The euro always proves to be more resilient than people think," he added. "If you look at Draghi on July 4, he mentioned forward guidance, we come to today's (ECB) meeting and the euro is stronger and money market rates in the euro zone are higher. The BoE's new regime change is also undermining sterling."
—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave